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Hy­dro­gen in the energy market

Climate neutral hydrogen and its secondary products are increasingly being recognised as a key element in the energy system. A number of countries have already adopted national hydrogen strategies, including Japan in 2017, France, South Korea and Australia in 2019, and the Netherlands, Norway and Germany in 2020. This shows that the climate-related and industrial policy potential of hydrogen is becoming widely recognised. The challenge now is to prepare to reap the benefits of the emerging global hydrogen market. The EU has also sent a clear signal in this respect with the hydrogen strategy it announced in July 2020.

Basic properties make hydrogen attractive

Hydrogen is always chemically bonded and practically not found in its pure form. Unlike natural gas, for example, it needs to be produced first, with a variety of energy sources being used for this purpose. It is a carbon-free energy carrier that produces no pollutants under combustion. Hydrogen is also used as a feedstock in industrial processes. When produced from renewable energy, it is referred to as CO2-free hydrogen and provides a means of storing renewable electricity. Hydrogen can be transported in a number of ways, including via existing gas networks. Transport is also possible in other forms, e.g. as ammonia. Hydrogen is additionally suitable for long-term storage. All these properties make it a valuable tool in fighting climate change.

Hydrogen colour coding for different production pathways

To distinguish between the various production pathways and the resulting CO2 emissions, it has become customary to classify hydrogen by colour (although in fact it is colourless). Black hydrogen is produced from hard coal, brown hydrogen from lignite and grey hydrogen from natural gas. Collectively, these types are often subsumed under the term “grey hydrogen”. Blue hydrogen is produced from fossil fuels such as natural gas, with the CO2 created during the process being separated out and stored or processed downstream for industrial purposes. Turquoise hydrogen is produced by thermal splitting of methane – natural gas is split into hydrogen and solid carbon through methane pyrolysis. Green hydrogen is produced solely from renewable energy. The main method deployed is water electrolysis, in which electricity is used to split water into its constituent parts, hydrogen and oxygen. The frequently used term “power-to-gas” refers to this water electrolysis process.

Hydrogen economy with “conventional” stages of the value chain

The hydrogen value chain is largely identical to that of other energy forms. Production is the starting point. Unlike oil and natural gas, however, this does not consist of exploration and extraction, but rather of production in the narrower sense. The next stage is transport, with a wide range of options such as gas pipelines, ships and trucks. Hydrogen can also be stored before consumption, e.g. in natural gas storage facilities or in tanks. In an interconnected supra-regional hydrogen system, local distribution will take place close to the point of consumption, with distribution again featuring the above-mentioned transport modes. Potential consumption sectors, such as industry, transport, buildings and power generation, form the end of the value chain.

Hydrogen production currently based on fossil fuels

study published by the International Energy Agency (IEA) in 2019 found that around 40% of the hydrogen produced worldwide is a by-product of industrial processes and 60% is produced specifically as hydrogen. Natural gas (73%) and coal (23%) account for the largest shares. At 0.1%, electrolysis currently plays a negligible role. The main costs in production are the prices of fossil fuels, electricity and CO2. Production of grey hydrogen is still the cheapest option in most cases at this time. The German government’s National Hydrogen Strategy currently puts total production for industrial applications at around 55 TWh. Most of the hydrogen used in Germany is produced by steam reforming or is a by-product of chemical processes.

Hydrogen transport plays only a minor role at present

IEA figures show that globally, 85% of hydrogen is consumed near where it is produced. Only 15% is transported by pipeline. There are approximately 5,000 km of hydrogen pipelines worldwide. Germany has two pipeline systems: in the Rhine-Ruhr region (240 km) and in Leuna (around 100 km). One option for transporting hydrogen is to add it to the natural gas network. At present, the blending rate is limited to 2%, with an increase up to 20% under discussion. In the medium term, however, most observers are sceptical about blending as an option for a future hydrogen network. The focus is more on repurposing existing natural gas pipelines or constructing new hydrogen pipelines. Another option for long-distance transport is to use a hydrogen carrier material.

Consumption mainly in industry

Globally, hydrogen consumption is dominated by industrial applications such as petroleum refining and the production of ammonia, methanol and steel. In Germany, hydrogen is likewise mostly used as a feedstock in these areas. There is hardly any direct use of hydrogen as an energy source. Consumers mainly produce the hydrogen they require themselves. In the Network Development Plan for Gas 2020–2030, total hydrogen demand in Germany in 2017 is estimated at 69.0 TWh. 

Hydrogen has major potential in consumption sectors

In the Network Development Plan for Gas 2020–2030, total hydrogen demand in 2030 is estimated at 94.4 TWh. Compared to demand in 2017, this represents an increase of 25.4 TWh. 

The industrial sector, which already uses large quantities of grey hydrogen, offers the potential for substantial CO2 savings through switching to green, turquoise or blue hydrogen. In addition to the existing applications, hydrogen can also deliver major CO2 savings in steel production if the coke-based blast furnace process is converted to direct reduction plants. Process emissions in the cement industry can also be avoided by using hydrogen.

Similarly, the transport sector offers considerable opportunities for hydrogen. According to the IEA, there are currently around 11,000 fuel cell vehicles worldwide, out of a global vehicle population of more than a billion. Around 400 hydrogen filling stations are available to serve this fleet. Fuel cell technology is particularly suitable for heavy goods and long-distance transportation. Hydrogen could also play a major role in shipping, with 90% of physical trade around the world involving ships. Trade volumes are predicted to triple by 2050. In the railway sector, the first hydrogen-powered trains are already operational in Germany. Lastly, electricity-based fuels will also play a greater part in aviation in future.

The buildings sector offers further potential for using hydrogen. According to the IEA, buildings account for around 30% of global energy consumption. Half of this consumption is met by fossil fuels and half by conventional electrical systems. 28% of carbon emissions from the global energy market are attributable to the buildings sector. Hydrogen can be blended here with natural gas, used as synthetic natural gas made from renewable hydrogen or in pure form.

Last but not least, hydrogen can also be used to generate electricity, for example by converting renewable hydrogen back into electricity. However, this application is not of any significance in Germany at present.

Policy makers set course for hydrogen integration

Key political decisions have been taken to establish a hydrogen economy both within Germany in the National Hydrogen Strategy adopted by the federal government and at EU level in the EU hydrogen strategy put forward by the European Commission. The intention is that hydrogen should make a core contribution to achieving climate neutrality. It would be used initially in sectors where it is most likely to achieve competitiveness. Hydrogen is also expected to be used in areas that are difficult or impossible to decarbonise without CO2-free hydrogen. The German government is providing a total of EUR 9 billion in funding to make hydrogen viable in the market. An additional factor to remember is the industrial policy potential arising from existing expertise around hydrogen technologies.

In addition to the national perspective, collaboration between Member States and at EU level will be of considerable importance. This is partly due to the fact that investment totalling billions of euros will be needed to help producers, consumers and network operators adapt. The creation of a liquid EU internal market also requires harmonisation of the regulatory framework, definitions, technical standards and specifications for equipment technology. 

Legal framework yet to be established

Despite hydrogen having been produced and consumed in industry for many years, the legal framework for broader market introduction of hydrogen in the various consumption sectors is still far from adequate. Following the decision to integrate hydrogen into the energy market, this issue has now become a matter of real urgency.

The EU Commission announced a review of the legal framework in its hydrogen strategy. This will focus in particular on the Internal Market Directive for natural gas 2009/73/EC, which is set to also cover the hydrogen sector in future. Any amendments to the Directive must then be implemented in national law by the Member States within the transposition period.

Germany is already one step ahead here. The 2021 amendment of the Energy Industry Act (EnWG) introduced an optional regulatory system for hydrogen networks. This gives network operators a one-time right to choose whether they wish to be subject to regulation or not. If they choose regulation, negotiated network access applies. The basis for calculating network fees is laid down in the Hydrogen Network Fee Ordinance (WasserstoffnetzentgeltVO). The incentive regulation system does not apply. Unbundling of accounts and of information is required for network operation.

There is also a need for a legal review of surcharges and levies in the electricity sector. Since production of green hydrogen is still far from being competitive in Germany, these costs have an additional negative impact on market viability. As a first move towards removing these obstacles, the Renewable Energy Act (Erneubare Energien-Gesetz – EEG) 2021 provides for complete exemption of green hydrogen from the EEG surcharge.

Despite the above, the essential rapid expansion of renewable energy is being hampered by obstacles that are widely acknowledged, but which are not yet being addressed with sufficient determination. Approval procedures are too complex and protracted. There is also insufficient land designated to meet expansion requirements. One approach would be to simplify the procedures around constructing facilities to generate power from renewables. The slow progress being made on expansion of the network also needs to be accelerated.

If you have any questions about the legal and regulatory framework for hydrogen networks, the use of hydrogen in the consumption sectors, the relevant surcharges and levies, or you need assistance in assessing the resulting impact on your business, please do not hesitate to get in touch with your usual contact at CMS or Dr Friedrich von Burchard.