1. Introduction
In the race to achieve carbon neutrality, hydrogen has a vital role to play across all sectors to create a resilient energy system. Countries all over the world are announcing initiatives and adopting national strategies to incorporate hydrogen into their energy mix. To facilitate the adoption of hydrogen, policymakers around the world are busy constructing such regulations and legislations that either mandate the implementation of this clean fuel or provide incentives to market players or consumers that want to adopt hydrogen. The Biden administration and European Commission are the two entities that are currently in the limelight for their respective hydrogen policy frameworks. The Inflation Reduction Act announced by the Biden administration last year and the recently announced European Delegated Acts have taken the hydrogen industry by storm with many shocked by the stringent nature of the European rules. Activists remain divided on the announced European rules that define renewable hydrogen, limiting its scope due to several conditions and leaving the door open for blue hydrogen - hydrogen produced from fossil fuels.
2. European Delegated Acts on Hydrogen
On 13th February 2023, the European Commission proposed detailed rules to define what comes under the term 'Renewable Hydrogen' in the EU, along with the adoption of two Delegated Acts required under the Renewable Energy Directive. These Acts provide not just rules for producing green hydrogen but also state a balance of different scenarios where hydrogen production can be considered renewable.
The 1st Delegated Act defines the conditions under which hydrogen, hydrogen-based fuels, or other energy carriers can be considered as a renewable fuel of non-biological origin (RFNBO) whereas the 2nd Delegated Act provides a methodology for calculating life-cycle greenhouse gas (GHG) emissions for RFNBOs which takes into account the GHG emissions across the entire lifecycle of the fuels, including upstream emissions, emissions associated with taking electricity from the grid, from processing, and those associated with transporting these fuels to the end-consumer. The rules for renewable hydrogen production along with the associated principles mentioned in the Delegated Acts are depicted in figure 1 below.
3. The U.S. Inflation Reduction Act to Advance Hydrogen Economy in the Country
On 16th August 2022, the American President signed the Inflation Reduction Act (IRA) into law, making it the most significant action that Congress has taken on climate change and clean energy in the nation's history. Termed a landmark legislation by many, the IRA set aside around 369 billion USD for energy security and climate change initiatives, including an unprecedented focus on clean and green hydrogen. The act introduced a clean hydrogen production tax credit along with extending the existing investment tax credit to hydrogen projects and standalone hydrogen storage technologies. Figure 2 highlights the various tax credits offered for renewable hydrogen and fuel cell industry under IRA.
4. Why are the European Delegated Acts on Hydrogen attracting criticism: A comparison with the U.S. IRA.
Only projects meeting the requirements mentioned in the Delegated Acts will be able to receive subsidies from the EU or National governments. These acts, although still to be adopted, are facing more criticism than praise, especially in the European Union (EU). Due to the ‘same hour’ requirement of the principle of temporal correlation, most of the time electrolyzers might remain idle unless the project is of a very large size and has large battery systems for storage. This will cause a delay in green hydrogen production in large volumes and stunt the output of electrolyzers. Moreover, due to the intermittent nature of renewables especially solar and wind, a disruption of the continuous hydrogen supply is expected. Critics of the Delegated Acts claim that the principles of additionality and temporal and geographical correlation will increase the overall cost of a renewable hydrogen project and hence, slow the trajectory of cost reduction of green hydrogen. Furthermore, the Levelized Cost of Hydrogen (LCOH) will have to bear the highest impact of these acts as the LCOH is inversely proportional to the operational hours of electrolyzers which means that if the operational hours of electrolyzers increase then the LCOH is lower and vice versa. In this case, due to the condition of temporal correlation, the operational hours of electrolyzers will decrease causing an increase in the LCOH.
The Brussels-based industry association, Hydrogen Europe, claims that the stringency of these rules will inhibit the development of the market stating that they can be met but will inevitably make green hydrogen projects more expensive and hence, will limit the expansion potential of hydrogen. Contrary to this, the proponents of these acts say that it is better than having no regulation at all. These acts are good for countries that already produce most of their electricity from renewable sources as these plants would be classified as fully renewable under the new rules. Only Sweden and Norway are set to benefit from this as they are hydro-heavy nations and already source most of their power from renewables. In Norway, 99% of electricity production comes from renewable energy sources whereas Sweden produces around 67% of its electricity from renewable sources. Moreover, the grid connection requirement of these acts states that hydrogen will be considered renewable only if the emission intensity of electricity used is below 18g C02e/MJ or 65g of CO2e/kWh. At present within the EU, only Norway, France, and Sweden meet this criterion as they had power emissions of 17 g CO2e/kWh, 58 g CO2e/kWh, and 28g CO2e/kWh in 2022 respectively.
The proposal to adopt these acts comes at a critical time, with the U.S. setting a very high benchmark with their Production Tax Credits, offered under the Inflation Reduction Act (IRA), which are attracting more and more investments toward the country's clean hydrogen market. Through the Inflation Reduction Act, the U.S. has made the adoption of green hydrogen easier by providing tax credits to green hydrogen producers, hydrogen FCEVs, and hydrogen refueling stations. Realizing the energy transition will require redirecting investments into areas of clean growth while also attracting new foreign investment sources that are capable of boosting economic growth more broadly. Interest from the private sector along with new sources of investment can help the clean or low-carbon hydrogen industry to scale up while also creating such efficiencies that drive down prices. In absence of subsidies, the private sector will choose the cheapest way to produce hydrogen which is usually through fossil fuels. These clean hydrogen tax credits are designed to redirect the market to cleaner forms of hydrogen production. Investment tax credits will encourage investors to take on investment risk for clean hydrogen projects, while production tax credits will provide an additional return on investment beyond market prices.
Contrary to this, the European Commission's new rules although will be crucial in achieving the carbon neutrality targets yet might act as a barrier to the adoption of green hydrogen as the strict additionality requirement will make green hydrogen production more expensive. Moreover, the concept of temporal correlation may inhibit the utilization of electrolyzers to their full extent causing a delay in achieving the desired amount of green hydrogen production. Furthermore, the adoption of the concept of additionality after 31st December 2027 may motivate project developers to complete their green hydrogen projects before the said date, causing an abrupt increase in the demand for electrolyzers which will require the scale-up of existing electrolyzer manufacturing capacities that are currently not up to the mark. The principle of additionality applicable from 1st January 2028 means that there could be a potential drop in the development of hydrogen projects during the 2028-2030 period with a rapid expansion in hydrogen production capacity up to 2028, and a potential drop until the end of the decade.
5. Conclusion
The recently announced European Delegated Acts have taken the European hydrogen industry by storm. Â Although aimed to promote clean energy production and usage for the accelerated energy transition. These acts are being criticized for being too stringent and eventually increasing the overall cost of renewable hydrogen production. Contrary to this, the clean energy tax credits and other provisions included in the U.S. Inflation Reduction Act would promote domestic hydrogen production and accelerate energy innovation abroad. These tax credits are designed to spur private investment, growing the clean, low-carbon hydrogen industry, and driving down prices. Moreover, IRA will allow the cleaner forms of hydrogen production to compete with dirtier alternatives, bolstering a clean fuel needed for deep decarbonization, and attracting growth and jobs into the clean-energy industry.
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