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In the wake of the Fukushima nuclear disaster, the German Government announced the importance of Germany’s energy transition, and the importance of the role of hydrogen in this transition. The aim of Germany’s energy transition is to replace nuclear and conventional fuels with renewable energy. At present renewable fuels account for 43% of the German electricity mix (as at the end of 2019).
Hydrogen is playing an increasingly important role in this energy transition. This has been particularly highlighted by the announcement of the National Hydrogen Strategy by the German Government in June 2020 as described in more detail below.
Domestic hydrogen consumption currently amounts to 55 TWh. Hydrogen is used mainly in industrial processes such as the production of basic chemicals like ammonia and methanol as well as in the petrochemical sector. Most of the hydrogen used in industry is grey hydrogen produced from natural gas , whilst only 7% of current demand is provided by green hydrogen from electrolysis.
By 2030 hydrogen demand is expected to increase considerably, particularly in the industrial sector for use with chemicals, petrochemicals, and steel. In addition, growing demand is expected in the transportation sector.
Power to Gas
Gas transmission operators (“TSO”) Gasunie Deutschland and Thyssengas in cooperation with electricity transmission system operator TenneT TSO are planning a 100 MW power-to-gas pilot project in Lower Saxony (project “Element Eins”). It is scheduled to become operational in 2022. By converting green energy into gas, the plant will create new opportunities for the storage of renewable energies. The project aims to achieve a comprehensive coupling of the energy, transport and industrial sectors. Gas that has been produced from green energy will be transported from the North Sea to Central Germany through existing gas pipelines. Moreover, it could be made available to the transportation sector through hydrogen filling stations and to industrial consumers through storage caverns. At the time of writing the project is on hold by the Federal Network Agency (“BNetzA”) due to unbundling concerns regarding the operation of storage facilities (i.e. power-to-gas plants) by transmission network operators.
Amprion and OGE are planning a major power-to-gas plant in Northern Germany (project “Hybridge”) to convert renewable electricity into green hydrogen. Amprion is to build a 100 MW electrolyser while OGE is to convert an existing gas pipeline into a pure hydrogen pipeline. The partners expect the project costs to be around EUR 150 million. Like Element Eins this project is on hold by BNetzA due to unbundling concerns regarding the operation of storage facilities by network transmission operators.
The WESTKÜSTE 100 project in northern Germany is being led by companies from different sectors such as EDF Germany, Holcim Germany, OGE, Ørsted and Thyssenkrupp Industrial Solutions. The project is aimed at producing green hydrogen from offshore wind and recovering the waste heat generated. The green hydrogen will be used to produce aircraft fuels or will be fed into a new hydrogen grid, which will connect the refinery, the hydrogen storage facility, a hydrogen filling station and the existing municipal natural gas grid. Within the initial five-year project period, an electrolysis plant with a capacity of 30 MW is to be installed. It is also anticipated that the project could be scaled up to include, for example, an electrolysis plant of 700 MW capacity with the electricity generated by an offshore wind farm.
Together with partners such as ONTRAS and Uniper, VNG Gasspeicher is planning the construction of an electrolysis plant with a capacity of up to 40 MW for the conversion of green electricity from a wind farm specially built for the project into green hydrogen ("Energiepark Bad Lauchstädt"). The hydrogen produced will be stored in a dedicated salt cavern, fed into the existing network and supplied to the chemical industry, the transportation sector and for urban energy supply. A special feature of the project is the large-scale storage of hydrogen. The planned salt cavern would be the first cavern in the world to store green hydrogen, and would be specially equipped for the storage of up to 50 million m³ of hydrogen.
Gas Transmission Network
The German TSOs have proposed a “hydrogen starter network 2030” as published in their proposal of the Gas Network Development Plan 2020-2030 (“NDP”). The first converted pipelines will, as early as at the end of 2022, provide the core of a nationwide hydrogen network, which will gradually evolve and expand until 2030. The starter network with a length of more than 1,200 km will connect demand centres in North Rhine-Westphalia and Lower Saxony with green hydrogen production projects in Northern Germany. By 2030, the starter network will primarily consist of pipeline conversions, while only about 100 km will be newly built dedicated hydrogen pipelines. There are plans for a first interconnection point for imports via the Netherlands as well. Investments of around €290 million are expected by the end of 2025 to build the starter network with a total of €660 million by the end of 2030. However, besides the approval of the NDP the implementation of the starter network requires adjustments to be made to the legal framework, as discussed in more detail below.
OGE has signed a network connection and use contract with an onshore wind farm (“Bürgerwindpark”) in Northern Germany, allowing hydrogen to be blended into the gas network. The hydrogen comes from a community wind farm with a total capacity of 67.2 MW. As part of a site expansion, the wind farm will be equipped with a 2 MW electrolyser to convert the renewable electricity into hydrogen which is then fed into the gas pipeline system.
The Carbon2Chem project explores how industrial gases from steel production can be used to create valuable primary products for fuels, plastics, or fertilisers. The chemical processes involved require the use of hydrogen, which is to be produced from green energy by way of electrolysis. The Carbon2Chem approach is expected to make 20 million tons of the German steel industry's annual CO2 emissions economically exploitable in future. This represents 10 percent of the annual CO2 emissions from German industrial processes and the manufacturing industry. The German Federal Ministry of Education and Research is funding the project with more than €60 million. The partners involved intend to invest more than €100 million by 2025.
Transport applications play an important role in the future German hydrogen economy, although they are still in early stages. Hydrogen-based mobility is seen as an alternative option for those applications where using electricity directly is not reasonable or technically feasible. Hydrogen could be applied in a wide range of sectors such as local public passenger transport, heavy-duty road transport and commercial vehicles. The introduction of fuel cell vehicles can also complement battery-powered electric mobility. In certain areas, hydrogen may also provide an alternative for cars. If hydrogen is to be used in road transport, refuelling infrastructure must be expanded as needed. As of January 2020, there were 87 refuelling stations in Germany. An expansion by 15 stations per year is envisaged to accommodate the increased use of hydrogen in transport.
Uniper and General Electric (“GE”) signed an agreement in June 2020 aiming at a long-term collaboration of the decarbonisation of Uniper's gas-fired power plants and natural gas storage facilities. GE’s Gas Power business and Uniper will explore, assess, and develop technology options for decarbonisation. The agreement aims at producing a detailed decarbonisation roadmap by early 2021. This roadmap is to develop an assessment of potential upgrades and R&D programs needed to drive decarbonisation, including increasing the use of emissions-friendly hydrogen in GE gas turbines and compressors in Uniper's power plants and gas storage facilities across Europe.
2. MARKET PROSPECTS FOR HYDROGEN
Areas of Growth
Areas of growth and resulting market prospects are defined in the National Hydrogen Strategy published by the German Government in June 2020, as discussed in more detail below.
Although the hydrogen market in Germany is still in early stages there is already a well-established history of public funding. The funding from the Federal Ministry for Economic Affairs and Energy for research and development in the field of fuel cell and hydrogen technologies is tied into the “National Hydrogen and Fuel Cell Technology Innovation Programme” (“NIP”) which was launched in 2006. The programme is being continued as the Government’s NIP2 programme (“NIP2”) in the 2016-2025 period. Up to 2016 the Federal Government provided funding amounting to EUR 700 million in total. From 2016 – 2026 public funding will amount to EUR 1.4 billion. In June 2020, the Government adopted a “package for the future” which makes available another EUR 7 billion for speeding up the market rollout of hydrogen technology in Germany and another EUR 2 billion for fostering international partnerships.
The NIP2 programme builds on the maturity of technology and market availability attained in the first generation of equipment. In view of the forthcoming market launch phase, the aim is to ensure that the national activities of science, industry and government continue to take place under a common umbrella. The intention is to continue developing innovations in hydrogen and fuel cell technologies which are not yet ready for market, to build up the appropriate infrastructure and to use appropriate instruments and measures to support the placing on the market of technologies which are on the cusp of a market launch.
Because of the nascent status of the hydrogen projects there has been little M&A activity in the sector. This may change in the medium term once the National Hydrogen Strategy is implemented by market players.
3. CHALLENGES FACING HYDROGEN PROJECTS
Legal and Regulatory Framework
As in other jurisdictions, the legal and regulatory framework for hydrogen is not yet comprehensive. As described in more detail below, there is no consistent and complete framework covering the hydrogen value chain in Germany. Regulations and definitions are lacking or unclear. A framework for carbon capture and storage necessary for the market launch of “blue” hydrogen is lacking completely. Even the fundamental question of whether and, if so, how the established regulatory system for gas should apply to hydrogen is still waiting for a reply. All of this will have to be tackled within the context of the implementation of the National Hydrogen Strategy.
As outlined above, over the past few years the funding from the German Government for research and development in the field of hydrogen was substantive. According to the National Hydrogen Strategy, Germany now has the chance to play a key role in international competition for the development and export of hydrogen and Power-to-X technologies. The broad-based community of German stakeholders in the hydrogen technology field, with their substantive international connections, will not only be a key factor for the successful market ramp-up of hydrogen technologies in Germany, but will also improve the opportunities of German firms in this forward-looking market. The manufacture of components for the generation, use and supply of hydrogen will contribute to regional value creation and strengthen the companies active in these fields.
Other than the existing market for grey hydrogen mainly in industrial applications there is no market for green hydrogen as of today in Germany. Given the fact that the production of green hydrogen is by far more expensive than grey hydrogen, the market launch of green hydrogen is largely dependant on incentives for its production and use. Potential incentive mechanisms range from tax measures, quota regulations, changes in the emissions trading scheme and feed-in tariffs, to exemption from transportation and storage tariffs.
It is not clear whether green hydrogen will be the only option for Germany or whether at least for a transitional period blue hydrogen could pave the way for a hydrogen economy. Because of the large quantities of grey hydrogen already used in industry, blue hydrogen is seen as a potential transitional substitute to enable a shift towards a lower-carbon intensive hydrogen economy. Against this background, the German Government underlines the fundamental role of green hydrogen in the energy transition, whilst acknowledging a transitional role for blue hydrogen.
4. REGULATION OF HYDROGEN
Construction of Hydrogen Production Facilities
The construction and operation of a hydrogen production facility such as a power-to-gas plant requires the execution of an authorisation procedure pursuant to the Federal Immission Control Act. This encompasses a preliminary audit under the Environmental Impact Assessment Act. The requirements of the Hazardous Incident Ordinance also have to be fulfilled.
The definition of “gas” in the Energy Act encompasses hydrogen as long as it is produced by electrolysis (power-to-gas).
Hydrogen produced by electrolysis also falls within the definition of “biogas” in the Energy Act, thereby profiting from the privileges for biogas concerning preferential network connection, network access and balancing.
Since hydrogen produced from electrolysis is defined as gas, pipelines transporting such hydrogen would qualify as gas supply networks under the Energy Act. To make things difficult, this applies to distribution networks only, since the definition of gas transmission in the Energy Act refers to the transmission of natural gas, thereby excluding hydrogen of any type.
Other types of hydrogen like blue hydrogen are not covered by these definitions at all. Consequently, they fall outside the scope of the Energy Act and its related regulations.
Pure hydrogen transmission networks are not covered by the existing regulatory framework.
As of today, a maximum of 10%hydrogen can be blended into the natural gas grid. According to the reports from the Technical Gas Association this share may be increased up to 20%. As part of the NDP the TSOs have announced their intention to completely convert existing pipeline sections to hydrogen and to build new hydrogen trunklines.
Under the Network Access Regulation, the injection of biogas (and hence hydrogen produced from electrolysis) into the gas transmission grid is free of charge.
Under the Network Access Regulation, the injection of gas (and hence hydrogen produced from electrolysis) into the local gas distribution network is free of charge.
Generally, facilities producing hydrogen from electrolysis are exempted from network access charges under the Energy Act.
5. REGULATORY BODIES
There is no specific regulatory body which is responsible for the regulation of hydrogen projects. As far as hydrogen falls under the existing regulation of the gas and electricity markets the Federal Network Agency BNetzA is the competent authority on a federal level.
6. UPCOMING DEVELOPMENTS
The National Hydrogen Strategy
In June 2020, after long discussions the German Government announced the National Hydrogen Strategy.
For details see https://www.bmwi.de/Redaktion/DE/Publikationen/Energie/die-nationale-wasserstoffstrategie.html
According to the overarching principle of the strategy, security of supply, affordability and environmental compatibility need to be combined with innovative and smart climate action in order for the energy transition to be successful. This means that the fossil fuels currently used need to be replaced by alternative options. This applies in particular to gaseous and liquid energy sources, which will continue to be an integral part of Germany’s energy supply. Against this backdrop, hydrogen will play a key role in enhancing and completing the energy transition. The first step to be taken to speed up the rollout of hydrogen technology is establishing a strong and sustainable domestic market for the production and use of hydrogen in Germany.
The cornerstones of the strategy are as follows:
The German Government expects that around 90 to 110 TWh of hydrogen will be needed by 2030. In order to cover part of this demand, Germany plans to establish up to 5 GW of generation capacity including the offshore and onshore energy generation facilities needed for this. This corresponds to 14 TWh of green hydrogen production and will require 20 TWh of renewables-based electricity. An additional 5 GW of capacity is to be added, if possible, by 2035 and no later than 2040.
A domestic market for the production and use of hydrogen has to be established. If hydrogen is to have long-term prospects, capacities for generating electricity from renewables (particularly wind power and photovoltaics) must be systematically improved. The introduction of CO2 pricing for fossil fuels used in transport and the heating sector is an important element to support green hydrogen production and will be complemented by a reduction of the EEG surcharge.
The industrial sector is well-placed to become one of main factors speeding up the market rollout of hydrogen and a global pioneer for hydrogen technology. It is estimated that more than 80 TWh of hydrogen would be needed to make German steel production CO2-neutral by 2050. Around 22 TWh of green hydrogen would be needed for German refinery and ammonia production to switch to hydrogen. The switch to hydrogen in the industrial sector will be supported by providing funding for investments in electrolysers. Furthermore, a new pilot programme entitled “Carbon Contracts for Difference” is due to be launched which targets the steel and chemical industries with their process-related emissions. Under this programme, the German Government will guarantee funding amounting to the difference between the actual cost of avoiding emissions/a project-based contractually agreed carbon price per amount of greenhouse gas emissions avoided, and the ETS prices for the construction and operation of decarbonisation technologies to achieve greenhouse gas neutrality
Transport applications offer great potential for hydrogen uses. Hydrogen-based or power-to-gas based mobility can be an alternative option for those applications where using electricity directly is not reasonable or technically feasible. In the long term, air and maritime transport in particular will develop a demand for carbon-neutral fuels which can be supplied in the form of hydrogen-based energy sources from power-to-gas processes. In air transport as well as coastal and inland navigation, fuel cells and battery-powered drives may also be an option for certain mobility needs.
Even after the efficiency and electrification potentials for process heat generation and the building sector have been harnessed, there will continue to be long-term demand for gaseous fuels. In the long run, hydrogen and its downstream products can help in various ways to decarbonise parts of the heat market. For the period from 2020-2024, up to EUR 700 million can also be used for funding fuel-cell heating systems.
The German Government is due to appoint a National Hydrogen Council. The Council will be made up of 26 high-level experts from business, science, and civil society who are not part of the public sector. The task of the National Hydrogen Council is to advise and support the State Secretaries’ Committee through proposals and recommendations for action in implementing and enhancing the Hydrogen Strategy.
Draft Amendment to Energy Act Regarding the Regulation of Hydrogen Networks
On 10 February 2021 the German government passed the draft of an amendment to the Energy Act which contains new provisions for the regulation of hydrogen networks. The purpose of the amendment to the Energy Act is to gradually build up a hydrogen infrastructure in Germany. The provisions are intended as a transitional solution until corresponding European guidelines are available. The EU Commission has announced that it will present proposals on this by the end of 2021. Implementation into German law is expected from 2025 onwards.
So far there are only a few hydrogen pipelines in Germany which are not regulated as they are direct pipelines used for industrial purposes. According to the explanatory notes on the legislation, in view of this, there is no intention to subject existing or future hydrogen pipelines to mandatory regulation. Instead, this decision is to be left up to the pipeline operators. However, the German government presumes that as more and more interconnected hydrogen networks are developed, there will be a need to subject them to comprehensive regulation.
The draft provides for the following framework conditions:
In the definition of the term "energy" in section 3 no. 14 Energy Act, hydrogen is fundamentally categorised as an independent energy carrier alongside gas. However, this is only intended to apply to pure hydrogen pipelines. For the blending of hydrogen into the natural gas network, the existing legal framework continues to apply on the basis of which hydrogen produced by electrolysis falls under the definition of gas.
According to section 3 no. 39a Energy Act, a hydrogen network is a network for the purpose of supplying customers with hydrogen which, in terms of its size, is not designed from the outset to supply specific customers or customers which are specifiable at the time when the network is constructed but which is, in principle, open for the supply of all customers. Industrial pipelines which connect a generation plant with dedicated individual consumption sites are therefore not covered by the Energy Act by their very definition.
Section 28j Energy Act gives operators of existing networks and newly constructed networks a unique and irrevocable right to choose whether they want to be subject to the newly introduced regulation of hydrogen networks or not. This also applies to the conversion of natural gas pipelines to hydrogen. The right to choose applies to the operator in general and not to individual pipelines. Those who choose not to be regulated will not be covered by the requirements regarding network access, tariffication and unbundling as explained below.
According to section 28n Energy Act, network operators are required to grant access and connection to their hydrogen networks based on the principle of negotiated network access. The standardised contracts for regulated network access to the natural gas network, which have been continuously developed since 2006, therefore do not apply. Whether a correspondingly uniform contractual practice will nevertheless emerge remains to be seen.
Section 28o Energy Act provides for cost-based tariffication which is largely in line with the current legal situation. The conditions and tariffs must be reasonable, non-discriminatory and transparent. Application of the Ordinance on the Incentive Regulation of Energy Supply Networks is not planned, but is not completely ruled out. This is logical as benchmarking between network operators would not make sense in the beginning with only few operators to compare. A prerequisite for cost recognition is a positive needs assessment of the hydrogen infrastructure in accordance with section 28p Energy Act.
According to section 28k Energy Act, the operators of hydrogen networks must carry out separate accounting and bookkeeping for their networks (unbundling of accounts). This serves to avoid cross-subsidisation and discrimination. Particularly in the case of simultaneous operation of long-distance gas networks, the aim is to prevent costs for the hydrogen infrastructure being included in the transmission tariffs.
In accordance with section 28m Energy Act, hydrogen network operators may not construct, operate or own facilities for the production, storage or distribution of hydrogen. The requirements on informational unbundling also apply. Legal unbundling in the sense that the operator of a hydrogen network must be separated from an energy supply company in terms of its legal form is not prescribed.
Section 113a Energy Act regulates the transfer and continued application of rights of way and easements for gas pipelines. Under this provision, these also apply to the operation of these pipelines with hydrogen. This also applies, as a matter of principle, to concession agreements. This is intended to facilitate the transition from gas pipelines to hydrogen.
Transmission system operators can identify pipelines that could be converted to hydrogen in the framework of the Gas Network Development Plan in accordance with section 113b Energy Act. It must be ensured in this respect that the remaining network can meet the capacity requirements.
Last but not least, an independent Network Development Plan is to be drawn up for the hydrogen networks. The target year for this is 2035. This rejects the idea of joint network planning with the natural gas network.
The draft met with sharp opposition from the associations of network operators. The separation between the natural gas and hydrogen networks was criticised as an obstacle to rapidly and efficiently developing a hydrogen infrastructure. Separate tariffication, in which the network tariffs for hydrogen would have to be significantly subsidised in the start-up phase, would lead to higher network tariffs overall. The argument that separation would avoid cross-subsidisation, which is questionable under EU law, is not convincing, they said. Network user associations, on the other hand, welcomed the idea of separate tariffication saying that natural gas customers should not pay for the development of hydrogen networks which are primarily for industrial applications.
Whether a transitional solution with a right to choose for the network operators as envisaged in the draft is actually sensible is questionable. The draft itself presumes that full regulation will be necessary in the medium term. The artificial separation of the natural gas network from the hydrogen network is not convincing either. In the future hydrogen will take over the role of natural gas. The gas network therefore needs to be transformed into a hydrogen network. We can expect that the conversion of existing gas pipelines will be the vital backbone of the future hydrogen network. This will be operated by the existing network operators. In view of this, it is not clear why natural gas and hydrogen networks should remain separate for a transitional period.
Finally, the draft paints a colourful picture of network access to hydrogen networks. In the case of unregulated network operators, there is network access, if any, on the basis of the general legal provisions. The conditions are completely unclear. At regulated network operators negotiated network access applies which had to give way to regulated access to gas networks 15 years ago. Finally, when hydrogen is fed into the natural gas network, regulated network access on the basis of the Energy Act applies with conditions that are standardised down to the very last detail.