As 2021 came to a close, companies in Europe’s emerging hydrogen economy gained long-awaited legal clarification from the EU, with recommendations for a market framework laying the groundwork for growth in the months ahead.
The European Commission’s Hydrogen and Decarbonized Gas Package, which was announced on December 15, would help usher in a golden age of hydrogen.
The guidelines will make it easier to integrate hydrogen into existing gas infrastructure and reduce entrance barriers, providing countries like Germany, France, and Spain more clarity on how to meet their national hydrogen production targets.
Market activity may have already been encouraged by the package, as well as a modification of state aid laws for climate-friendly technologies, which was also announced in late December.
Several other hydrogen production projects were announced or firmed up in the week following its introduction, including Lightsource BP Renewable Energy Investments Ltd.’s 200-MW portfolio in Portugal and RWE AG’s Lingen project in Germany. A consortium led by EDP – Energias de Portugal SA is also moving forward with a 100-MW project in Sines, Portugal, using McPhy Energy SA as the equipment supplier.
Analysts point to previously little progress made in 2021 on de-risking hydrogen investments and enabling commercial-scale projects as evidence that the EU’s regulatory clarity was long needed.
This spilled over into the equity market, with some publicly traded hydrogen equipment companies, such as Norway’s Nel ASA and Canada’s Ballard Power Systems Inc., losing nearly half of their value throughout the year after seeing their stock prices surge in 2020. ITM Power’s stock fell as well, bucking the market trend.
In 2021, there was more agreement on the importance of renewable-powered green hydrogen, particularly for heavy industry.
In so-called hard-to-abate sectors, where electrification is more problematic, hydrogen use-cases are most obvious. Existing hydrogen superusers, such as ammonia producers, who consume grey hydrogen produced in emissions-intensive processes, are likely to move to green fuel, with governments prioritizing adoption in this sector.
According to S&P Global Platts, the future of European gas pricing is largely dependent on the approval of the Nord Stream 2 gas pipeline, which is expected to begin operations in June 2022. Green hydrogen projects will require assistance to overcome the price premium, especially if gas prices decline. Carbon contracts for difference, which guarantee a fixed payment for CO2 emissions reductions beyond price levels in the EU’s carbon market, are one option recommended by many in the sector.
Policymakers have stated a wish to avoid a repeat of the solar industry’s fate, which saw the manufacture of technologies created in Europe shift to more cost-effective markets overseas in the 2000s.
Throughout, governments must strike a balance between the requirement for size and strict sustainability standards. In 2021, the discussion over blue hydrogen, which is produced from natural gas and carbon capture, heated up even further as scientific findings cast doubt on its suitability as a transition fuel.
Hundreds of billions of euros will be required to expand the green hydrogen market. The EU unlocked fresh funds on Dec. 22 as it expanded access to state aid from member countries for new technology.
Progress is also being made in the banking industry. For new technologies like hydrogen, banks typically want long-term contractual certainty, as well as a creditworthy firm to deliver the project and assume technology risks. The first project finance funds are expected to come into the hydrogen sector in the near future.
The financial sector has gained a deeper grasp of green hydrogen, its use-cases, and its restrictions during the course of 2021. Simultaneously, project sponsors are improving their abilities to link the structure of their projects with commercial lenders’ expectations for green hydrogen project bankability.