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A consensus is fast emerging that hydrogen will play a key role as an energy vector and a pillar in the ongoing energy transition. It promises to accelerate transformative changes across many sectors, most notably energy and transport. This guide draws together the insight of some of the most experienced global energy experts to provide a timely and insightful perspective on how hydrogen projects may proceed, and the sector develop, across the globe.
As energy lawyers, we are accustomed to the emergence of new technologies. Nevertheless, each emergent technology’s unique characteristics need to be respected. It would be complacent to think that hydrogen can be treated like natural gas, or other energy sources, for the purposes of legal and regulatory frameworks, investment cases, financing structures, operational requirements, revenue stream arrangements and the panoply of other elements that need to be considered to formulate an effective commercialisation model.
The term “hydrogen economy” is not new, but the role that hydrogen can, and is expected, to play in the economies of many of the jurisdictions covered in this guide demonstrates the revitalised ambitions of this subsector. But this guide also highlights the fact that progress is not equal in all places. What are still an emerging suite of technologies and an immature web of policy and regulatory frameworks in some jurisdictions, are developing quickly into a supportive system ready to welcome private sector investment in other countries. What is clear is that the promise of hydrogen developments and uses is rapidly evolving as governments and market players are waking up to its benefits and potential.
With many countries committing to having major low-carbon hydrogen projects underway by 2030 and committing to achieve net zero targets, investors have to take a truly global perspective on the sector.
This guide sets out the ease (or otherwise) of developing hydrogen projects across the jurisdictions covered – highlighting the status of hydrogen developments in each country; considering the market prospects and opportunities ahead that are key for our clients who are seeking to enter or expand in this sector; what challenges need to be overcome in order to reach national and international goals and how the national and international specific legislation and regulations in each jurisdiction facilitates this growing sector.
Overarching Context: The Paris Agreement and Net Zero
Supranational policies and frameworks helpfully guide the longer term direction and developments at national levels. In this case the supranational commitment is made through the Paris Agreement by 189 countries, representing 97% of global emissions.
All of the countries covered in this guide are signatories to the Paris Agreement (albeit the US has notified the United Nations of its intention to withdraw from the Paris Agreement). The Paris Agreement is one of the most ambitious international agreements within the United National Framework Convention on Climate Change (“UNFCC”). It commits signatories to responding to the threat of climate change by keeping any global temperature rise this century to well below 2 degrees Celsius above pre-industrial levels, and better still, to pursue efforts to limit the temperature increase to 1.5 degrees Celsius above those levels. Since then, a number of countries have adopted legally binding targets to reach “net-zero” in terms of their greenhouse gas emissions by 2050. Alongside national governments, similar commitments are being made by major businesses and investors, who are also seeking to decarbonise their products and processes.
The countries covered in this guide have or are in the process of creating legal frameworks to support their vision. For many this vision includes hydrogen playing a key role in achieving their Paris Agreement climate change ambitions and net zero targets in a number of sectors, most notably in transportation, heating and industry.
Different legal regimes for different “types” of hydrogen
From the perspective of investors in the sector, it is important to recognise that while the molecules are indistinguishable, hydrogen is classified according to the way that it is produced, and categorised by colour. References to the following colours are for hydrogen produced in turn: “grey” from methane gas, “black” from coal or “brown” from lignite. Currently around 95% of the hydrogen produced in the world is grey or brown, 76% from natural gas and 23% from coal.
IEA World Energy Outlook, 2019
“Blue” hydrogen is produced using methane gas with carbon capture and storage technology. This type of hydrogen is seen as carbon neutral but not strictly renewable. “Green” hydrogen is produced through electrolysis, which is the process of splitting up water (H2O) into hydrogen and oxygen, using renewable energy (for example, wind or solar energy). There are a number of other “colours” of hydrogen that are less relevant from an investors perspective and are not covered in this guide.
It is understood that a move away from grey hydrogen will be necessary to meet the decarbonisation targets many countries have set out. However, blue hydrogen’s attraction comes from the scale of production that it offers and the ability to use carbon capture storage technologies to prevent the emission of carbon dioxide into the atmosphere. Many of the jurisdictions covered in this guide are focusing on the advancement of green and blue hydrogen.
Green hydrogen is typically made through electrolysis - which in its simplest terms requires an electrolyser to break down water (H2O) into hydrogen and water using renewable sources such as wind, solar and hydro to generate the electricity used for the process.
Blue hydrogen is seen by many as an enabler in the commercial development of low-carbon hydrogen projects. It’s success depends in part on the role of carbon capture usage and storage (CCUS), which in turn suits some countries (such as the UK, Netherlands, Norway and parts of the US) better than others which do not already have storage infrastructure to exploit.
An example is the Austrian, Hydrogen eMoblity AG, which announced green hydrogen produced from gasification of wood at previously unattainable production price and energy efficiency.
A number of hydrogen plus CCUS projects and business models are under consideration and covered in the guide. For example, the UK is specifically developing business models for hydrogen and CCUS projects over the coming years.
While there are a number of demonstration projects being developed, at present the high cost (of the energy hungry) electrolysis is a significant barrier. As a result, just 2% of global hydrogen production is currently produced by electrolysis. However, green hydrogen perceived as the ultimate goal and there are new national and supranational policies emerging that promote the use of electrolysers.
The UK is not alone at having spotted the blue hydrogen opportunity. In the Netherlands, led by a consortium comprising state owned companies, the Porthos project focuses on the capture of CO2 within the port of Rotterdam from existing hydrogen production facilities with a view to producing large-scale blue hydrogen and reduce emissions by 2030. The captured CO2 will be transported and stored in a depleted gas field in the North Sea.
In this case, for the manufacture of hydrogen, hydrogen is considered renewable where:
the level of direct CO2 emissions from manufacturing of hydrogen are 5.8 tCO2e/t;
electricity use for hydrogen produced by electrolysis is at or lower than 58 MWh/t; and
average carbon intensity of the electricity produced that is used for hydrogen manufacturing is at or below 100 gCO2e/kWh.
In practice, investors, developers, financiers and advisors seeking to invest in renewable hydrogen projects should note that this narrows the options to “green” and “blue” hydrogen.”
Sector-specific Legal & Regulatory Challenges
Hydrogen has the potential to play a significant role the transportation sector. The International Energy Agency (“IEA”) estimates while batteries are seen as a viable technology for passenger vehicles, as seen through the uptake of electric vehicles (“EV”) globally, hydrogen-based mobility is a complimentary option. Hydrogen can be applied in a wide range of sectors such as local public passenger transport, heavy-duty road transport and commercial vehicles, as well as in marine, rail, and possibly, even in aviation. The guide has highlighted several jurisdictions (notably Korea and Japan) where fuel cell technology ("FCEV") shows significant prospect for use in road and rail transport.
What is a hydrogen fuel cell?
Fuel cells, and in particular, hydrogen fuel cells, are key for a number of hydrogen applications. In a fuel cell, the chemical reaction is used to generate electricity.
In a hydrogen fuel cell, the chemical reaction involves combining hydrogen and oxygen to generate electricity, heat, and water. The chemical reaction in a hydrogen fuel cell continues for as long as there is sufficient fuel and therefore it does not have range limitations common with battery technologies. Because there are no moving parts, the fuel cells operate silently.
Fuel cells are used in a number of application today. These tend to be mixed fuel cells (i.e. a mixture of chemical compounds, which often include hydrogen). For example, fuel cells are used in providing back up power in facilities like hospitals, retail and data centres, as well as, increasingly, in a variety of transport.
This raises a number of legal issues for companies seeking to enter the hydrogen mobility sector. Despite the first hydrogen refuelling station having been installed over 10 years ago, only a few of the countries we surveyed have specific legislation for hydrogen refuelling. In this uneven landscape, while in countries such as Germany, Denmark, the UK and the Netherlands authorities can look to existing rules, in other countries, a number of different authorities may need to be involved to develop the legal and regulatory framework for hydrogen. Further, without existing rules it is more difficult to navigate the permitting and regulatory regimes, with the process slowed down if the authorities are less familiar with the issues.
The opportunity to educate, create, and harmonise some of the standards may be afforded through the focus on the roll out of hydrogen buses. Many of the countries we surveyed focus on public transport as the key area for using hydrogen in the mobility sector. The UK has already seen the rollout of zero emission hydrogen buses and has committed to introducing 3,000 buses by 2024. Similarly, Japan is aiming to have 1,200 fuel-cell buses on the road by 2030. More than for decarbonisation purposes, hydrogen fuelled public transport is gaining popularity due to the added benefits of also improving local air quality thus also bringing public health benefits. Given that contracting for public transport and associated infrastructure often involves a governmental authority as the counterparty (whether for the land rights, the leases of the transport etc.) buses could be the catalyst for the build-up of the administrative knowledge and processes.
With a number of governments are focusing their R&D efforts and providing grant funding to those developing the mobility sector options, questions arounds eligibility, stability and sufficiency of such funding are often asked. For example, if state funding is available to encourage individuals to purchase hydrogen fuelled vehicles, issues of state aid and procurement will need to be carefully considered and managed. Assuming this can be done purposefully and effectively, hydrogen fuel transport could mirror the rapid uptake seen in EVs in some countries.
Though at an earlier stage of development, hydrogen technologies could also be used in shipping and aviation, though our experts agree that significant changes to the existing practices would be needed in these areas.
For further consideration of hydrogen use and opportunities in the automotive sector, please see here.
Unsurprisingly the guide underscores the significant hydrogen demand in industrial processes. The IEA estimates that the total global demand for hydrogen will be around 40 million tonnes per year over the coming decade.
IEA (2019), The Future of Hydrogen, IEA, Paris https://www.iea.org/reports/the-future-of-hydrogen
This includes using hydrogen in various industrial processes including oil refining, ammonia production, and steel production. The hydrogen used in these industries is generally “grey”, and as such there is a large opportunity to decarbonise this sector by transitioning to blue or green hydrogen. One such example is the HyNet project in North West England which proposes to develop a hydrogen cluster in which 10 large industrial sites would be converted to use 100% green hydrogen.
Clearly the challenge with adapting and retrofitting existing infrastructure to produce low carbon hydrogen is not without its challenges. As with much else in this developing sector, first of its kind projects act as path finders in the administrative, permitting and regulatory processes. As such the time and complexity is a burden that needs to be addressed to facilitate further developments, and attract outside investments and financings. As it is already used in the manufacturing process, there are fewer novel technical barriers to consider. Nonetheless, the cost of production, based on current technology, is inevitably higher, which combined with the economic and regulatory challenges that require thorough understanding and review, are delaying unlocking what is a sector clearly suited for this transformation.
For further consideration of hydrogen use and opportunities in the industrial processes, please see here.
A number of countries have identified hydrogen as part of their plan for decarbonising heating. In the UK, for example, the gas network provides natural gas to over 80% of residential homes and commercial buildings for heating. Decarbonising this network could be paramount to achieving net zero aims. A number of countries, such as Portugal, Germany and France, have initiated pilot projects to test the blending of hydrogen into the gas grid. With some, such as the Netherlands, which intends to eliminate the use of natural gas in the built environment by 2050.
Several demonstration projects are currently testing the blending of up to 20% of hydrogen into the existing gas grid from a technical and engineering perspective. What is less clear is how the technical and safety tests about the limitations of hydrogen blending, link with the current legal frameworks. At present, while there is a harmonised legal regime for ownership and operation of the gas networks (though the EU Third Package Directive), the design of the legislation is firmly centred around methane gas and gas quality standard (based on calorific value; Wobbe Index). However, blending hydrogen changes the calorific value of gas carried in the grid. The existing ways of regulating gas transmission, the payment terms for the various entities involved as well as questions of gas quality standards impacted by blending and deblending hydrogen into/out of the grid each requires further consideration. As identified in our guide, in a number of jurisdictions, the gas transmission rules were drafted into law decades ago, well before the opportunities for heating with hydrogen, let alone having a 100% hydrogen gas network, were contemplated.
If the ambition is to enhance the prospects of using hydrogen networks for heating, further work and studies are needed to link the safety and technical integrity requirements in all parts of the heating chain, including at the end user interface, with the current regulatory frameworks. The final picture is also likely to be hugely dependent on the country and region specifics may vary in terms of their own seasonality of demand and levels of available infrastructure.
Further Challenges Identified in this Guide
Lack of administrative practice and guidance adds to the costs and complexity of authorisations
While some jurisdictions, such as Austria, South Korea, and Japan are centralising the permitting processes and simplifying the requirements on operators seeking to develop hydrogen projects, in many other jurisdictions the complexities in the permitting regimes are yet to be addressed. As we have seen with other emerging technologies, the lack of past projects for guidance can result in inconsistencies in approach between the responsible authorities as well as lead to complex, protracted discussions before authorities are able to interpret the existing rules and grant the necessary permits.
The burden on the investors to engage stakeholders in the process is thus extended to capacity building of not just the public but also the competent authorities, which adds to the cost and time involved in the process of developing hydrogen projects.
Faster deployment can facilitate reduction in costs
Following on from the above, a key challenge in the hydrogen market today is cost and the need for the creation of a sufficiently large marketplace to achieve economies of scale. While electrolysis using electricity from renewable energy sources may be the more environmentally sustainable method of producing hydrogen, currently it can be two to three times more expensive compared to hydrogen produced with natural gas or fossil fuels (without CCUS).
As we have learnt from other new technologies, costs fall when there are enough projects to form a critical mass of investment. National policies are key for attracting more projects to be developed and thus driving down costs. Recognising this, the European Commission published an ambitious strategy in July 2020. This seeks critical mass investment to make hydrogen more cost effective. Estimated costs today for fossil-based hydrogen are around 1.5 EUR/kg for the EU, for fossil-based hydrogen with carbon capture and storage around 2 €/kg, and for renewable hydrogen 2.5-5.5 EUR/kg. The strategy notes that carbon prices in the range of EUR 55-90 per tonne of CO2 would be needed to make fossil-based hydrogen with carbon capture competitive with fossil-based hydrogen today.
The costs of renewable hydrogen are going down, however. For example, electrolyser costs have already been reduced by nearly 60% in the last ten years and are expected to halve in 2030 compared to today with economies of scale. Electrolyser costs are predicted to decline from €900/kW to €450/KW or less in the period after 2030, and €180/kW after 2040.
Absence of a facilitative legislative framework and need for reform
Reflective of the nascent yet developing array of hydrogen technologies, legislative frameworks have not always caught up with development ambitions. As such, another key challenge that has emerged in this guide is the lack of a clear legal and regulatory framework for hydrogen. The majority of countries rely on their existing gas regulations to regulate hydrogen. Due to the different nature and use of hydrogen these frameworks are not always appropriate, and market players would benefit from the introduction of a clear regulatory framework to encourage the development of a hydrogen economy.
From a lack of clear legislation, the counterbalance is practice not totally suited to new ways of working. Although most hydrogen is produced and consumed on the same site, or transported short distances by road or pipeline,
According to the IEA there are in excess of 4500km of hydrogen pipelines in operation globally, mainly in the US and in Belgium.
for transporting hydrogen over longer distances is restricted. The flammable characteristics of hydrogen require extreme care when handling (and transporting it). Hydrogen is a colourless, odourless and flammable gas, and its large scale use has commonly been perceived as risky because of how easily it may leak and ignite in relatively low temperatures. Much of how hydrogen storage and transport is treated has developed over time from industrial uses of hydrogen, and the understanding of hydrogen as a fuel source by relevant stakeholders and authorities is therefore important in their decisions on whether to authorise the activity in these newer contexts.
A unified vision for hydrogen on Europe? The European Hydrogen Economy
Several countries have adopted national hydrogen strategies but the EU has set out a transnational hydrogen strategy applicable across all member states, many of which are covered in guide. The long awaited Hydrogen Strategy for a Climate-Neutral Europe (the “Strategy”) sets out the EU-wide vision for decarbonising a range of sectors across Europe. The Strategy estimates that hydrogen is expected to provide at least 13% of the final energy mix by 2050 in Europe. Following in the footsteps of several European national hydrogen strategies, this Europe wide strategy is expected to encourage the development of a hydrogen economy across Europe.
On the back of this EU-wide framework, a number of other jurisdictions explored in this guide await the pending publication of a roadmap or strategy for the implementation of hydrogen in their countries. These strategies will help set out a clear path for accelerating the deployment of a hydrogen economy in the respective countries. As we have seen in other sectors (eg renewables), the EU-wide direction can stimulate the national legislative systems to create further local policy and thus investors greater certainty in venturing into this sector. This is the expectation for countries, such as Poland where the Polish Ministry of Climate intends to publish the Polish Hydrogen Strategy setting out its vision for the development of hydrogen in Poland.
There are a number of ambitious hydrogen strategies being released across the globe sending signals to investors regarding the openness of such countries to developing hydrogen projects, and stimulating public awareness and acceptance. In countries where we have seen new technologies like hydrogen take off, the strategies need to be supported by availability of capital. At present, while projects may fall below the capital requirements of large banks and institutional investors, many of the projects are relying on public support measures and government level financing initiatives that encourage the uptake of hydrogen. For example, the French Government intends to include support measures for hydrogen projects in the French economic recovery plan to be presented in Autumn 2020. The Minister of Economy has indicated a possible increase of investment up to several billion euros in hydrogen.
France's previous hydrogen strategy, presented in 2018, limited investment to 100 million euros.
In early 2020 the UK government announced a £90 million fund to tackle emissions from homes and heavy industry. £70 million of this includes funding for two of Europe’s’ first-ever large scale, low carbon, hydrogen production plants: on the river Mersey and in Aberdeen, as well as for developing technology to harness offshore wind off the Grimsby coast to power electrolysis and produce hydrogen.
With state sponsored support, it is therefore important to consider the state aid requirements to achieve the right balance of support and retaining value to consumers. Further, given that many of the public grants are managed by state entities and local authorities, appropriate public procurement steps is key to projects’ success. Indeed, navigating the pathway of successfully bidding for, securing and maintaining government support and funding has been identified as a key challenge by many countries listed in this guide.
The last 12 months has seen a flurry of announcements and plans being published. A plethora of hydrogen applications is poised to emerge that will help business and nations to decarbonise a range of sectors and unlock new market opportunities. Beyond the energy, transport and heating opportunities, countries are looking to low-carbon hydrogen to help improve air quality in cities, produce local jobs, improve energy security, as well as providing much needed grid stability services to offset some of the issues associated with increased levels of intermittent generation. Being an energy vector, hydrogen is a platform that spans across a number of industries and legal disciplines. As energy lawyers working across the globe, we now that the reasons why a given hydrogen project will succeed in a given location will be uniquely dependent on the factors that are most important in that scenario, be it clean air or back up power.
The demand for hydrogen has grown more than threefold since 1975 and continues to rise.
Whilst this is almost entirely supplied from fossil fuels at present, the R&D and demonstration efforts are finding and refining yet more ways of producing low-carbon hydrogen that can help decarbonise a range of sectors. For example, during the year of 2019, the fuel cell electric vehicle market almost doubled,
owing to expansion in markets such as Japan and China. The same trajectory is true for other modes of transport be it passenger vehicles, heavy-duty vehicles, public transport and even railways. Beyond transport, the grey hydrogen demand in industry presents a significant opportunity to decarbonise this sector. Where not used on site, the pipeline networks are being put to use by blending different levels of hydrogen into the gas networks. These are just some of the examples our experts highlight in this guide. From Saudi Arabia to Japan to California, the range of legal frameworks, business and financing models, operational requirements and many other factors are being tested as we write.
Plainly, hydrogen has an important and increasing role to the global, national and local economies. It remains to be seen which countries will lead the way in uncovering the promise of the hydrogen opportunity. From our experience, countries which support the development of commercially sound business cases and establish enabling regulatory frameworks to support the development of this technology are the likely early winners in this race. Further as the costs of electrolysis decrease and a symbiotic relationship develops between renewables and hydrogen production and offtake, new business models will emerge and new products will be created. The consensus across the guide’s contributors is that hydrogen will play a key role as an energy vector and a core pillar in the energy transition we are experiencing. This may just be the beginning.
Our contributors and energy specialists in each jurisdiction remain at your disposal and would be delighted to discuss more specific details and developments.