Germany’s hydrogen strategy gets a facelift
First published in 2020, the strategy was supposed to be updated every three years. However, Germany’s current predicament and the change in government last year has resulted in a new draft being published now. To help meet the ambitious target of developing 10 GW of electrolysis capacity, this new draft contains one or two interesting innovations compared with its predecessor.
Expansion of electrolysis capacity
Particularly surprising is the inclusion of blue hydrogen imports and production, which are justified based on the shortage of green hydrogen. For green hydrogen, in 2023 alone, 2.2 GW of electrolysis capacity is expected to be approved in total, covering both onshore and offshore installations combined with wind power. In addition to these projects, which will be funded as IPCEIs (“Important Projects of Common European Interest”), 500 MW of electrolysis capacity will be tendered for annually up to and including 2028 as part of the Wind Power at Sea Act.
Grid expansion
In addition to the ambitious targets for electrolysis capacity, the draft also contains extensive new provisions regarding hydrogen infrastructure. Also supported as IPCEIs, the goal is to have 1850 km of hydrogen network built by 2027. In addition to 1050 km of converted gas infrastructure, 800 km of new hydrogen pipelines are to be built. Existing gas storage infrastructure will also be converted for use with hydrogen. The construction of three new cavern storage facilities is planned by 2027 and will be supplemented by successive retrofitting of gas storage facilities. As part of this, a national hydrogen reserve will be created to ensure crisis resilience. Especially interesting is that, with the new update, the government plans to establish a state agency that will not only oversee the construction of new hydrogen infrastructure but will also purchase existing hydrogen networks and natural gas networks needing conversion.
Since a non-negligible share of Germany’s hydrogen demand will have to be imported in the medium to long term, import pipelines are also planned and expected to be built by 2030. The German Federal Ministry for Economic Affairs and Climate Action announced a corresponding import strategy for next year.
The strategy also proposes various funding instruments to support an EU-wide ramp-up and covers the maritime and aviation sectors, which cannot be directly electrified. Here, the production of synthetic fuels is to be boosted in 2023 and ‘24.
Industrial Carbon Contracts for Difference (CCfD)
Alongside the new national hydrogen strategy, CCfDs to support industrial decarbonisation are also in the starting blocks. According to an announcement by Germany’s Federal Ministry for Economic Affairs and Climate Action, a consultation on the funding guidelines should have been completed by the end of December 2022, after which CCfDs should be made available to the industry following a final round of revisions.
Funding requirements
Following a compromise, the government has agreed not only on a 15-year term for CCfDs but also, more surprisingly, on support for blue hydrogen, i.e. production from natural gas combined with Carbon Capture and Storage (CCS). Hydrogen derivatives such as ammonia, methane and methanol will also qualify for funding. Even gas projects that plan to move to hydrogen could potentially be eligible for support.
Qualification for a subsidy will be closely linked to the assessed potential to reduce emissions. For blue hydrogen projects, the directive requires at least a 73.4% reduction in a project’s lifecycle emissions compared to fossil fuel use. Green hydrogen projects are granted higher funding than blue hydrogen equivalents. Pure CO₂ storage or pure CO₂ transport projects are not eligible for funding, unlike CCS projects along the entire supply chain. Additional qualification requirements include, firstly, that all projects must source 100% of their electricity from green sources and, secondly, that they must achieve at least 50% emission savings after one year and at least 60% after two years. Finally, all projects must achieve climate neutrality, i.e. guarantee emissions reductions of at least 95%.
Support mechanism
The CCfDs will provide, in effect, an operating cost subsidy. Low prices in the carbon market make investments in emissions reduction less attractive. To account for this, each of the contracts contains an agreed ‘Base Contract Price’. If this price is higher than the market price, the funded projects are compensated for the difference. If the market price for carbon is higher than the agreed Base Contract Price, then CCfD-recipients must pay the difference to the state.
A particularly innovative feature here is the dynamic nature of the Base Contract Prices. The price is adjusted annually based on the energy price trends relevant to the technology used by the funded project with the aim of smoothing out differences between the agreed and the actual carbon price. This makes the instrument both less risky for subsidised parties and more cost-efficient. For projects with successive fuel switches, this dynamic link adapts with the switches to follow the relevant energy carrier.
A pay-as-bid auction format with a maximum price is planned, in which bidders are awarded the contracts according to the order of their project’s assessment score. The overall assessment score is a weighted score, 70% of which reflects the project’s assessed subsidy cost. 15% weights are assigned to the assessed emission reduction and energy intensity respectively.
Bilateral cooperation creates business opportunities
In this context, Germany and Norway are strengthening and expanding their energy cooperation. Declarations to this affect were signed in January. Both countries have agreed on a strategic partnership covering cooperation on climate policy, renewable energy and green industry. In a Joint Statement on Hydrogen, both partners reaffirmed their joint intention to establish a large-scale supply chain for hydrogen by 2030 and established a goal to build the infrastructure necessary between Norway and Germany.
Please get in touch if you have questions or want to know how this might impact your business.
