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A global green hydrogen market, made in Germany?

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This article was originally published in Chinese in the Caijing energy column.

After half a year of interministerial debates, the German government has finally adopted its national hydrogen strategy on 10th June. The strategy acknowledges that “only hydrogen produced on the basis of renewable energies (‘green’ hydrogen) is sustainable in the long term” and that this should therefore be the priority area for investments. However, blue hydrogen from natural gas will be tolerated in Germany for a transition period.

The strategy also sets a target of 10 GW of domestic electrolysis capacity for green hydrogen made in Germany by 2040 at the latest, half of it (up to 5 GW) by 2030, including the required additional renewable energy generation capacities. The strategy also recognizes that the majority of the green hydrogen demand will have to be imported. Furthermore, the strategy shows that Germany wants to focus the use of hydrogen in industry (especially steel and chemical industries) and heavy goods transport. These sectors will be the first to benefit from market incentives to make green hydrogen competitive. Lastly, the strategy recognizes that hydrogen is a scarce resource and its use has to be limited to priority areas – those sectors that are hard to decarbonise through a direct use of electricity.

When presenting the strategy, the government clearly stated an ambition for Germany to become the global leader on green hydrogen technologies. This ambitious goal and the substance of the strategy itself mean that Germany’s national strategy will have strong effects on the global hydrogen market and will accelerate the development of green hydrogen technologies worldwide. Furthermore, Germany is in a relatively advanced stage of hydrogen policymaking, and its experiences illustrate where hydrogen can and cannot support green economic growth.

The political debate about the future use of hydrogen is often understood as a conflict between “blue” and “green” hydrogen. Blue hydrogen is produced from natural gas in combination with CCS, but it is not emissions free, as significant leakages of the greenhouse gas methane occur during the production and transportation of natural gas. Recent worldwide satellite data from the European Space Agency has shown that half of the 100 large methane leaks worldwide can be attributed to fossil fuels including natural gas. Therefore, many observers argue that hydrogen policy should focus on promoting green hydrogen, which is produced through the process of electrolysis from renewable electricity and water and is indeed without process emissions.

The choice between blue and green hydrogen is not just relevant from an environmental perspective. It is a strategic choice on many levels: green hydrogen allows the country to generate added value domestically as they can develop and sell innovative technologies for the electrolysis process and build electrolysers as well as renewable electricity capacities. The benefits of blue hydrogen, however, mostly flow to the countries that are exporting natural gas.  

Germany also is the third largest importer of natural gas worldwide after China and Japan, creating serious dependencies from gas exporters such as Russia. Green hydrogen, however, can be produced domestically or imported from countries with good renewable electricity potential. Lastly, there is still a lot of potential for innovation and cost reduction in the green hydrogen process, as large-scale electrolysis is a novel field of research, while most of the technologies used for blue hydrogen are already mature technologies.

Germany has recognised the strategic significance of the decision it faced and has chosen a clear direction of travel. Its strategy recognises that only green hydrogen is sustainable, which is important for reaping the economic and geopolitical benefits of hydrogen. It also states that hydrogen should only be used in processes that cannot be made climate neutral using other technologies, an important assumption to avoid inefficient use of hydrogen. Together, these premises amount to the right strategic framework for hydrogen, as they allow for economic diversification, creating added value domestically, and the possibility of attaining market leadership in innovative zero emissions technologies.

At the same time, a closer look at the strategy reveals that it leaves a door open for blue hydrogen being used during the transition, even though it will not receive direct public support. It also rules in the possibility of using hydrogen in processes such as heating and cars, even though it would be more economically efficient to use electricity directly there. This caveat can be explained by looking at the politics behind the strategy: the Economy Ministry was in charge of drafting the strategy, and it wanted to treat blue and green hydrogen equally following pressure from natural gas and some industrial companies. However, the Environment Ministry successfully made the case that a stronger focus on green hydrogen was necessary for a strategic development of the sector. Brief references to blue hydrogen and its use for heating and cars remained in the strategy so that a political consensus could be achieved.

A final issue that dominated debates in the weeks before the agreement was over expansion targets for electrolysis, with the Research Ministry demanding a target of 10 GW by 2030 while the Economy Ministry wanted to limit expansion to 5 GW due to concerns that the expansion rate of Germany’s renewable electricity capacity was too low for such targets. In the end, the Economy Ministry prevailed in this case, and the fact that now the two major German parties have rallied around this consensus shows that it is likely to be a stable compromise with long-lasting effects. It will also contribute to a renewed impetus for the expansion of renewable electricity sources in Germany, as could recently be seen in the government’s agreement for higher targets for offshore wind and a lifting of restrictions for solar PV.

Some important questions remain unanswered. Most importantly, the agreed strategy recognises that the targets for electrolysis are insufficient for Germany to cover its domestic demand for green hydrogen: by 2030, the government expects a domestic green hydrogen production of 14 TWh per year, but a demand of up to 110 TWh. This gap between supply and demand gives rise to the two most important lessons and implications from the German policy process.

First, it shows that hydrogen will not be a solution for every single economic sector, as it is a scarce and valuable resource. Therefore, policy makers should, first of all, aim to lower overall demand by increasing energy efficiency. They should also rely on the direct use of electricity, for example through electric vehicles or heat pumps for household heat, wherever possible, as this reduces the overall costs of greening the economy.

This insight is echoed in an analysis by consultancy BCG, which argued that governments “must steer clear of applications for which low-carbon hydrogen is unlikely to become cost competitive”. It has also been emphasized by eleven European states, including Germany, in a joint declaration this June, which emphasized “the need to put energy efficiency first and increase the direct electrification across all sectors”. Furthermore, the clear economic case for using electricity directly wherever possible is already influencing business decisions: one clear example is the recent decision of German carmaker Mercedes to stop its development of hydrogen cars.

Second, the gap between supply and demand is at the heart of Germany’s ambitions for a global market for green hydrogen, as the country itself will have to significantly rely on imported green hydrogen. When the strategy was presented, Economy Minister Altmaier emphasized the strategy’s global aspirations, saying that “we can only achieve the goals of the Paris Climate Agreement if we can develop a global market for green hydrogen”.

The success of this will depend on whether Germany can successfully reboot the energy diplomacy of the European Union as a whole, as it is planning to do during its Presidency of the EU in the second half of 2020. Here, success would require a clear turn away from a diplomacy built on the pursuit of fossil fuel imports to a dual strategy of supporting fossil fuel exporting countries in their transition away from fossil fuels while also building new relationships with exporters of clean energy, such as green hydrogen.

A new European approach to energy diplomacy, in combination with a planned European Hydrogen Strategy, could lead to a more assertive EU on the international energy stage. This could lead to intensified debates on a number of important policy decisions that will need to be made internationally in the coming months and years and where China and the EU, as the two most important importers of natural gas, have significant potential for cooperation. For example, there is a need for international norms on methane leakages from natural gas and oil, a major climate hazard, as repeatedly pointed out by the International Energy Agency. The development of the global green hydrogen market also requires agreement on international quality and sustainability criteria for green hydrogen.

Utilizing the strategic framework for green hydrogen that is embedded in Germany’s strategy could enable fruitful joint initiatives on these issues and also inform the decisions made on hydrogen development in China. This especially requires a rapid turn away from hydrogen generated from fossil fuels such as coal and gas to green hydrogen from renewables, and a clear prioritization of where hydrogen should be used given its nature as a valuable resource, relying on efficiency gains and electrification wherever possible, for example for private cars.

Image by thejedi via Flickr (CC BY-NC-ND 2.0).

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