Bringing a European hydrogen economy to scale

POSITION | ENERGY AND CLIMATE POLICY

Bringing a European hydrogen economy to scale Response to public consultations of the EU Commission

July 2020 Summary This position paper combines feedback of the Federation of German Industries (BDI) on the EU 23. Oktober Hydrogen Strategy as well as the Strategy for Smart Sector Integration. In addition, it touches upon some central topics of the revision of the guidelines for trans-European energy infrastructure. At the end of each chapter a summary of recommendations is presented. Key topics addressed in this contribution can be defined as follows: Internal hydrogen market: The establishment of an internal hydrogen market will be crucial to meeting the expected hydrogen demand. This paper proposes a market design for the internal hydrogen market and addresses such key elements as the amendment of relevant market regulation as well as classification and certification of CO2-neutral gases.

Global hydrogen trade: Even after the inner-European resources are tapped there will be a residual demand which will have to be covered by imports. By being among the pioneers developing a global hydrogen market the EU can become a key player in a changing energy landscape contributing to decarbonisation efforts of other regions and creating a perspective for today’s energy exporters. The paper suggests instruments for initiating international hydrogen trade and discusses potential partners.

Hydrogen as an enabler of climate-neutral industry: As an umbrella association of the German industry the BDI considers clean hydrogen with its derivatives to be central to maintaining industrial value chains on a climate-neutral continent. This paper presents a policy mix required to support the implementation of clean hydrogen in the industry sector such as the Industry-Contracts-for-Difference, Green Public Procurement and State Aid. Thereby, we take a stand on the design of these instruments.

Transport sector as a key to market ramp-up: The BDI considers the transport sector, especially the road transport, to be central to enabling a cost-efficient market ramp-up of hydrogen and renewable transport fuels. The upcoming reviews of fleet reduction targets, Energy Taxation Directive and the RED II should be used to leverage this potential. In addition, policies for industrial scaling of sustainable aviation fuels (SAF) will be discussed.

Comprehensive sector integration: For a comprehensive sector integration the use of hydrogen and its derivatives should be prospectively also enabled in the buildings and power sector. In addition, policies for ensuring a more efficient use of waste resources and energy efficiency in buildings should be implemented. Last but not least, the BDI calls for a reassessment of the energy efficiency definition to adjust it to the requirements of a sustainable hydrogen economy.

BDI Department Energy and Climate Policy I www.bdi.eu

2017

Contents Introduction.......................................................................................................................................... 4 Terminology use .................................................................................................................................. 4 1.

Key features of an integrated energy system .......................................................................... 5

1.1.

Integrated infrastructure ............................................................................................................. 5

1.2.

Internal hydrogen market ........................................................................................................... 6

1.3.

Functioning markets with tradable green products .................................................................... 9

1.4.

Renewable electricity as a key enabler of smart sector integration ......................................... 12

1.5. Support the development of climate-neutral carbon, CCUS technologies and CO2infrastructure........................................................................................................................................ 12 Summary of key recommendations Chapter 1 ............................................................................ 15 2.

Market ramp-up of a sustainable hydrogen economy in the EU .......................................... 16

2.1.

Use IPCEIs for establishing a competitive hydrogen economy................................................ 16

2.2.

Implement instruments to support clean hydrogen use in the industry sector ......................... 17

2.3.

Leverage the market ramp-up potential of the transport sector ............................................... 19

2.4.

Consider the future potential of hydrogen in the building sector .............................................. 23

2.5.

Create a perspective for hydrogen in power generation .......................................................... 24 Summary of key recommendations Chapter 2 ............................................................................ 25

3.

Efficient and smart use of resources ...................................................................................... 26

3.1.

Reassess the definition of energy efficiency ............................................................................ 26

3.2.

Launch a “smart� buildings renovation wave ............................................................................ 27

3.3.

Enable an efficient use of waste energy in all sectors ............................................................. 27 Summary of key recommendations Chapter 3 ............................................................................ 29

4.

EU import strategy for renewable energy carriers................................................................. 30

4.1.

Potential partners ..................................................................................................................... 30

4.2.

Instruments required to initiate an international hydrogen trade .............................................. 32 Summary of key recommendations Chapter 4 ............................................................................ 33

Imprint ................................................................................................................................................ 34

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Introduction The Federation of German Industries (BDI) welcomes the initiatives of the EU Commission to bring forward the development of a sustainable hydrogen economy in the EU and to enable a more effective energy system integration. An integrated energy system with a resilient EU-wide infrastructure, functioning markets and abundant renewable energy at competitive prices is a pre-condition for reaching climate-neutrality while maintaining industrial value creation in the EU. Thereby we consider the EU Strategy for Smart Sector Integration, the Hydrogen Strategy as well as the revision of the regulation for trans-European energy infrastructure (TEN-E) to be closely related to each other with their subjects being strongly interlinked. Therefore, with this position paper the BDI would like to use the opportunity to respond to the related public consultations.

The BDI considers clean hydrogen with its derivatives to play a particularly important role in sector integration and reaching the objective of climate-neutrality. At the same time, the development of a sustainable hydrogen economy can become a key element in the economic recovery of the EU post Covid-19 pandemic, as already rightly noticed in the Recovery Plan for Europe 1. Hydrogen can be implemented in all sectors for achieving an effective CO 2-reduction. Especially it is central to maintaining industrial value-chains on a climate-neutral continent. Finally, as a climate-neutral energy carrier hydrogen provides for a viable storage option which is crucial to increasing flexibility of the internal energy market. Therefore, in an ambitious scenario hydrogen consumption in the EU could increase from today’s 325 TWh up to 665 TWh in 2030 and 2 251 TWh in 2050 2. Thus, this paper focuses particularly on hydrogen without diminishing the potential of other sector integration options.

Firstly, this position paper addresses in our view the main features of a truly integrated energy system, in which clean hydrogen plays a crucial role, and suggests policy recommendations needed for overcoming the existing barriers. In the second part it focuses particularly on the market ramp-up of clean hydrogen on the demand side, focusing particularly on industry and transport sector. In section three other integration options as well as the topic of energy efficiency will be explored. Finally, in the last section a vision for an EU import strategy for renewable energy carriers will be presented.

With this position paper the BDI aims to constructively support the policy development process on the EU level as well as to provide impetus for the German presidency of the EU Council.

Terminology use Green hydrogen: Hydrogen produced in a process of electrolyses with renewably electricity.

Clean hydrogen: An overarching term used for CO2-neutral hydrogen, including “green hydrogen�, hydrogen produced from natural gas in process of steam reforming with carbon capture and storage (CCS) as well as hydrogen produced in the process of methane pyrolysis.

Renewable synthetic transport fuels of non-biological origin: Corresponds to the definition used in Renewable Energy Directive II. CO2-neutral fuels: An overarching term for renewable synthetic transport fuels of non-biological origin as well as advanced biofuels.

1 2

EU Commission (2020). The EU budget powering the recovery plan for Europe.

Hydrogen Europe (2020). Green Hydrogen for a European Green Deal. A 2x40 GW Initiative.

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1. Key features of an integrated energy system 1.1. Integrated infrastructure Modern, resilient infrastructure is a backbone of a functioning economy. In an integrated system the infrastructure planning takes a holistic approach to enable synergies and leverage the highest efficiency of the implemented resources.

An effective integration of gas, electricity and in future also hydrogen and CO2 networks is therefore at the core of smart sector integration. The EU strategy for smart sector integration as well as the revision of TEN-E should aim at enabling a better interconnectivity of these different infrastructures in the Member States but also across the entire internal energy market.

1.1.1.

Open the planning process to new types of infrastructure and include hydrogen into TEN-E

As the Member States and the EU as a whole proceed with establishing a competitive hydrogen economy, the infrastructure development scenarios and planning processes will need to include hydrogen and if applicable also CO2 networks. This also applies to the Ten-Year Network Development Plan (TYNDP) of the EU. In addition, the revision of the TEN-E regulation should enable the inclusion of hydrogen into the energy infrastructure categories as well as the definition of new strategic infrastructure corridors dedicated to hydrogen.

1.1.2.

Incentivise integrated infrastructure planning

Last year for the first time ENTSO-E and ENTSOG presented a joint scenario for the TYNDP. This practice should be further continued as it allows considering new types of infrastructure connecting electricity and gas grids such as the hydrogen grids, making TYNDP more comprehensive and therefore more suitable for defining strategic infrastructure corridors in the context of TEN-E. Joint scenario planning should also be increasingly implemented on the national level. Furthermore, the Member States should be encouraged to assess whether not only scenario development but also the planning process itself could be more closely coordinated between electricity and gas system operators. An integrated approach can lift significant synergies. For example, it would allow dimensioning the electricity grid below the peak load, as part of the capacity can be shifted into the gas or hydrogen grid. It is crucial that such cost optimisation approaches are utilised.

Creating an effective methodology for joint scenarios and/or integrated infrastructure planning is a highly challenging task. In 2019 the German Energy Agency (dena) has started a stakeholder process on developing such methodology for a so-called System Development Plan3, which if implemented could become a pre-stage of an integrated network planning process. The results of this project are expected to be presented in the course of 2020.

Based on the work already carried out in different Member States the EU Commission should lay down some common principles for an integrated scenario planning and include such principles into the TEN-

3

Dena (2020). Netzstudie III.

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E guidelines. This could ensure a more coordinated approach to energy infrastructure planning and development within the internal energy market.

1.2. Internal hydrogen market The EU Commission should use the EU Hydrogen Strategy to lay down the basis for a regulatory framework for hydrogen infrastructure in the EU paving the way for an internal hydrogen market.

Thereby, the EU should take an active role in supporting investments in retrofitting existing gas infrastructure and establishing new dedicated hydrogen networks, for instance in the context of the Projects of Common Interest (PCI). Such investments could also positively contribute to the economic recovery post Covid-19 pandemic.

1.2.1.

Develop a market design and a regulatory framework for an internal hydrogen market

As hydrogen undertakes a new role in the energy system and its increasing volumes enter the market, a market design for hydrogen transport and storage based on an appropriate regulatory framework linked to the existing natural gas regulation will be required to establish a well-functioning internal hydrogen market in the EU. The Hydrogen Strategy should lay down the basis for such a market design and identify relevant fields for EU intervention.

Establishing an internal hydrogen market will affect the existing market for natural gas. Therefore, a new market design will need to introduce EU-wide rules and standards that enable a coexistence of hydrogen and natural gas networks and their smooth interoperability. Such EU-wide rules and standards are crucial to ensure an effective cross-border trade of hydrogen that does not hinder the functioning of the natural gas market. This applies to cross-border trade within the EU and at a later stage also to the imports of hydrogen and its derivatives from third countries. At the same time, the market design will need to ensure that the requirements of different gas consumer groups are met (e. g. consumers of natural gas with high gas quality requirements which are sensitive to hydrogen blending 4, consumers of pure hydrogen).

Figure 1 depicts a market design which in our view considers these points: Parallel methane and hydrogen pipelines on the TSO level with a possibility of limited blending from hydrogen pipelines into methane pipelines, ensuring grid compatibility with consumers sensitive to hydrogen shares. Thereby, a stable hydrogen blending share can be ensured in methane pipelines. This is a crucial feature for safeguarding a functioning cross-border trade of hydrogen and natural gas as the share of hydrogen in methane pipelines can be regulated on the EU level. At the same time, parallel infrastructures are key to supplying consumers of pure gases, especially large consumers in the industrial sector.

On the DSO level the presented market design offers more flexibility of hydrogen blending in the network areas, where it does not cause any technical damage to natural gas consumers (see Infobox for more information on blending limitations). Yet, hydrogen blending, especially the volatility of hydrogen share in the natural gas network, is associated with technical challenges on the consumer side. Therefore, research and development of membrane technology for separating blended hydrogen from methane on industrial scale as well as of advanced measuring and regulation technology should be pursued and incentivised on the EU level. Meanwhile, parts of distribution system, in which consumers

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Blending hydrogen to natural gas may render natural gas unusable as a feedstock due to downstream processes not being able to process the hydrogen. For instance, processes using natural gas as feedstock in chemical reactions are very sensitive to hydrogen (e.g. desulphurisation of natural gas, acetylene production). The operation, safety and efficiency of certain processes can already be negatively affected by hydrogen contents as low as 1.5%.

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with specific gas quality requirements are connected, should be subject to limitations of hydrogen blending.

The implementation of such a market design requires an assessment of the existing gas market legislation for its applicability to hydrogen grids as well as in some cases an amendment of the existing market rules. Some key elements are as follows: â–Ş

It should be evaluated whether the Gas Directive 2009/73/EC is applicable to operation of pure hydrogen pipelines.

â–Ş

Definition of common standards for the share of hydrogen in methane pipelines at the border interconnection points to ensure a cross-border interoperability of gas networks.

â–Ş

Amendment of the relevant Network Codes in order to enable cross-border hydrogen trade.

Figure 1: Design of a gas grid infrastructure for methane and hydrogen.

Source: OGE (2019).

In our view, a comprehensive hydrogen network linking supply and demand in the energy sector might have to be regulated in a similar way to the natural gas grids. Looking at the future demand forecasts it seems undisputable that hydrogen grids will need to constitute a part of the general energy supply infrastructure, respecting principles of the internal energy market such as security of supply and competition via a non-discriminatory third-party access, where appropriate.

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1.2.2.

Develop a target-model of a future hydrogen network

In order to ensure connectivity between demand and supply centres a target-model of a future hydrogen network is required. Such a model should be based on a detailed assessment of hydrogen production potential in the EU and neighbouring third countries as well as demand requirements of the consumption centres within the EU. Thereby the target-model could provide a useful orientation for infrastructure planning and development, definition of strategic infrastructure corridors within TEN-E as well as the consequent selection of the PCIs. In its 2x40 GW initiative Hydrogen Europe has presented an outline for a European Transnational Hydrogen Backbone. The main part of this hydrogen backbone consists of re-used natural gas pipelines with new compressors. Also, the German Association of Gas TSOs (FNB Gas e.V.) has developed a vision of a 5 900 km long hydrogen network for Germany which includes border interconnection points to the Netherlands. Likewise, this vision is to over 90 percent based on the existing natural gas pipelines. Both mentioned concepts (Figure 2) could serve as a starting point for further work and the corresponding impact assessment of the EU Commission.

Figure 2: Left: An outline for a European Transnational Hydrogen Backbone.

Right: A vision of a hydrogen network for Germany.

Source: Left: Hydrogen Europe (2020). A 2x40 GW initiative; Right: FNB Gas (2020). A visionary map of a hydrogen network for Germany.

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Infobox: Technological limits of hydrogen blending Some of the industrial end-consumers such as the glass and ceramic industry are highly sensitive to variations of the gas composition and quality. In those cases, already the smallest variations in temperature have an impact on the final products (e.g. functional characteristics, optic and quality). Furthermore, hydrogen blending into the existing natural gas grid could have implications on the l use of natural gas as feedstock in the chemical industry. Blending in a share of above 1.5 percent in certain processes is already classified as critical. The adjustment to a new constant “gas mix” is partly technically feasible, however, especially the fluctuations in the gas quality are a limiting factor for a gradual blending-in of hydrogen into the gas grid.

In addition, a current norming for natural gas vehicles sets a limit to a maximum of 2 percent hydrogen concentration. For a higher hydrogen blending quantity e.g. CNG filling stations do not provide a warranty for the security of the vehicle.

Approaches like membrane technology and adsorbents could be applied to adjust blended gases to the requirements of sensitive consumption facilities. However, application of such technologies on an industrial scale is still at the research stage. In addition, a progressive measurement and control technology could minimize the negative effects of fluctuations in the gas composition. For the implementation of this technology at industrial scale further experimental development and tests in the industrial praxis would be required. Generally, it is considered that particularly for sensitive industrial processes high fluctuations in gas quality would undermine energy efficiency of production due to production losses and not equally balanced operation modes.

1.3. Functioning markets with tradable green products Locations with strong renewable energy potential and demand centres are unequally distributed across the EU. Due to the time lag in the development of the required infrastructure, foremost electricity and hydrogen grids, a decoupling of physical supply of renewable electricity and climate-neutral gases from their recognition on certain quota/targets as well as certification of products should be applied if feasible (“book-and-claim”). Primarily this is a viable option to bridge the transition period towards a climateneutral system, in which renewable energy will be abundant at all time. At the same time, it is reasonable to assume that even in such a system some decoupling will be necessary in order to provide for flexibility and liquidity of an integrated energy system. The same logic also applies to the certification of renewable transport fuels discussed in section 2.2.

An effective certification scheme for renewable electricity and climate-neutral gases and fuels is key to enabling the necessary liquidity of a cross-sectoral renewable energy trade. Whereas an EU-wide system of Guarantees of Origin (GOs) already exists in the electricity sector, a comparable certification system is missing for climate-neutral gases.

1.3.1.

Classification and certification of climate-neutral gases

Article 19 (2) of the Renewable Energy Directive II (RED II) opens an opportunity for the Member States to issue GOs for gases. However, there are currently several obstacles to implementing this provision.

Firstly, an EU-wide classification of climate-neutral gases has not been implemented yet; secondly, the features of the GOs for gases still need to be defined.

On the certification of climate-neutral gases a considerable amount of work has been carried out in the context of Madrid Forum. The BDI generally supports the proposal presented by the European gas industry at the last Madrid Forum in October 2019 (Figure 4). However, we see a risk of regulatory discrimination of decarbonised gases in this proposal and thus suggest introducing an overarching

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category of “climate neutral gases” to include both renewable and decarbonised gases (Figure 5).

Especially in times of post Covid-19 pandemic decarbonised gases are required to support the market ramp-up of relevant technologies and achieve industrial scale already in the short-term.

We urge the EU Commission to use the ongoing strategy development processes to implement an EUwide classification of climate-neutral gases which is crucial for their timely market ramp-up as well as for a coordinated implementation of Article 19 (2) RED II across the Member States. Currently, different national schemes coexist in Denmark, the Netherlands, Austria, Belgium or Sweden. At the same time, a harmonised classification scheme for gases provides a foundation for the classification and certification of synthetic fuels of non-biological origin.

In the next step, a reliable certification system based on the EU-wide legal classification of climateneutral gases needs to be established. In our view the certification system for climate-neutral gases should go beyond the currently known GOs scheme. Namely, it should combine the features of GOs with Sustainability Certificates (SCs) in order to enable the above-mentioned decoupling of physical delivery and the accountability on targets/quotas or product certification. If the certification of climateneutral gases solves only the labelling purpose (traditional GOs), it will limit the liquidity and tradability of climate-neutral gases and therefore considerably postpone thei r market ramp-up.

To combine both schemes – GOs and SCs – the certificates for climate-neutral gases will need to include the CO2-content of the certified gases. The European Federation of Energy Traders (EFET) has recently presented a corresponding proposal for so-called “Certificates of (avoided) emissions” developed by Frontier Economics, which the BDI strongly supports (Figure 3).

Figure 3: A proposal for combining GOs and SCs for an effective certification of climate-neutral gases.

Source: Frontier Economics (2020). Gas decarbonisation and sector coupling.

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Figure 4: Proposal of the European gas industry for classification of climate-neutral gases presented at Madrid Forum in October 2019.

Source: Madrid Forum October 2019.

Figure 5: A modified classification proposal of the BDI.

Source: BDI (2019).

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1.4. Renewable electricity as a key enabler of smart sector integration Abundant renewable electricity at competitive prices is key to achieving climate neutrality in all sectors, whether in its direct use or as hydrogen and its derivatives in gaseous and/or liquid form. Therefore, the EU Commission should intensify her efforts in expanding the installation of renewable energy plants across the EU and in bringing down the costs of renewable electricity. These efforts should go in parallel with the development of a European import strategy of renewable energy carriers, which should constitute an integral part of the EU Hydrogen Strategy. This topic will be discussed in further detail in Chapter 4.

1.4.1.

Joint renewable energy projects

Against the depicted background the BDI welcomes the initiative of the Commission to introduce a renewable energy financing mechanism, which would enable Member States to financially contribute to renewable energy projects in the Member States which provide for vast renewable energy resources and are therefore willing to “host� renewable energy projects. In our view this mechanism could leverage a higher potential of renewable energy generation in the EU. However, the BDI considers that the mechanism should be also extended to financing hydrogen generation facilities in combination with the renewable energy plants.

1.4.2.

Joint European offshore-wind projects

The renewable energy financing mechanism, however, does not offer a solution towards the implementation of joint offshore-wind projects. At the moment, a great potential of renewable energy generation in the North Sea and in the Mediterranean remains untapped. The development of a suitable methodology for hybrid projects linked to several countries is a challenging task. Such a methodology will need to address the division of costs and revenues as well as joint operatorship among other issues.

Therefore, we strongly support the objective of the German Federal Government to prioritise this topic in the context of her presidency of the EU Council and urge the EU Commission to support this initiative. In our view, the corresponding concept/methodology for joint European offshore-wind projects is at core of the envisaged EU Offshore-Wind Strategy, which is at the same time a key element in the development of a sustainable hydrogen economy in the EU. 1.5. Support the development of climate-neutral carbon, CCUS technologies and CO2-infrastructure For an effective and affordable scale-up of a hydrogen economy the use of decarbonised gases will be necessary, in particular in the transitory phase. When shifting to hydrogen technologies the industry will require significant amounts of hydrogen which will be hard to cover with green hydrogen only, as already mentioned above. Therefore, a clear commitment to CCU technologies and methane pyrolysis is required. Harnessing the world’s best wind and solar sites also requires converting renewable energy to methanol, ammonia or other synthetic fuels to transport it over long distances.

Besides the production of decarbonised gases and synthetic fuels efficient carbon cycles are essential also for some industrial process emissions, where carbon capture and storage (CCS) and carbon capture and use (CCU) either provide for the only feasible option to reduce process emissions (e. g. cement, calc) or represent a technological option next to hydrogen-based solutions (e. g. steel industry, refinery sector). The BDI has already presented in its Climate Path study in 2018 that at least an amount of 13 Mt CO2 CCS from process emissions will be necessary to meet a 95 percent emission

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reduction path by 20505. This view is also broadly shared by other organizations such as the International Energy Agency6.

Certainly, CCS and CCU technologies must be considered as a complement to direct emission reduction measures such as the roll-out of renewable energies. However, creating efficient carbon cycles connecting several sectors or branches can be an important step towards entering a further stage of the energy transition and integrating further sectors into the decarbonization process. Even though the industry already presents a number of pilot projects for establishing an intelligent carbon cycle, such as the production of fertilisers or synthetic fuels with recycled CO 2, those technologies are especially in Germany not part of an open debate due to a lack of public acceptance. Furthermore, an efficient carbon cycle market would need a respective infrastructure to transport CO 2. According to the abovementioned BDI’s study it would be necessary to start building such an infrastructure in 2030 the latest to come close to climate-neutrality by 2050.

But not only CCS and CCU can foster a sustainable carbon usage. Innovative technologies such as methane pyrolysis offer another opportunity to integrate climate neutral carbon into carbon dependant value chains. By using biomethane as a feedstock for hydrogen production with methane pyrolysis, not only climate-neutral hydrogen would be produced, but bio-based carbon could be made available as well. Acknowledging the need for sustainable carbon use options as part of the hydrogen strategy is needed as an important long-term contribution to climate protection, particularly in areas where carbon is a raw material or cannot be avoided.

Therefore, with the EU Commission should use the ongoing strategy development processes to lay down a foundation for a coherent regulatory framework for the use of climate-neutral carbon, CCS as well as CCU technologies that creates incentives for companies to invest in these technologies and provides for investment security. Today the regulatory landscape for such technologies is fragmented in the EU and the cooperation between the Member States is rather limited. Thus, we urge the Commission to take the following steps:

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▪

Enable an effective recognition of climate-neutral carbon and abated CO2: As mentioned above, for sustainable carbon technologies to become economically attractive for companies the regulatory framework should provide for a way to recognise the abated CO 2. Whereas CCS technologies are included in the ETS framework, the framework for CCU technologies is not quite clearly defined and the issue is rather complex. Climate-neutral carbon options are not even addressed. We therefore urge policy makers to elaborate a practicable way for making the sustainable use, capture and recycling of CO2 accountable towards emission reduction thresholds. The CCS Directive and the Reporting and Monitoring Regulation should be reviewed in this regard.

▪

Implement a certification scheme for CO2: There should be a practicable way of proving the origin of CO2 used within a carbon cycle. For the implementation of a well-functioning and transparent carbon cycle the introduction of a certification scheme for CO 2 could help further integrating processes and support the described accountability problematic. In addition, the regulatory framework would need standardized procedures of a Life-Cycle-Analysis for carbon cycles.

BDI (2018). Climate paths for Germany.

For instance 2 degrees scenario by IEA.

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▪

Facilitate investments in climate-neutral carbon, CCS and CCU projects such as by making them eligible for sustainable financing. Currently, the high upfront costs of CCS and CCU technology are a hurdle to the role-out of those technologies. At the same time, the European Investment Bank has no clear guidance whether it can support international CCU projects.

▪

Create a regulatory framework for cross-border infrastructure for CO2-transport. This includes a debate on how to generate investments in such an infrastructure and how to regulate its operation. Furthermore, it should also be clarified in how far this infrastructure will fall under the Monitoring Regulation. This also holds for the transportation of CO2 via ships or other carriers on land.

▪

Implement measures to increase public acceptance: An active engagement of the civil society in the policy development process, foremost relevant impact assessments, is key to increasing public acceptance. The areas of implementation of CCUS technologies should be made transparent to public and the reasoning behind their use should be clearly explained.

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Summary of key recommendations Chapter 1 1.1. Integrated infrastructure ▪ ▪ ▪

Incentivise integrated infrastructure planning on the EU as well as on the national level.

Include hydrogen and CO2 networks into the infrastructure development processes. This also applies to the Ten-Year Network Development Plan (TYNDP) of the EU. Include hydrogen into the energy infrastructure categories and define strategic infrastructure corridors dedicated to hydrogen within TEN-E.

1.2. Internal hydrogen market ▪

▪ ▪

Develop a market design for the internal hydrogen market which ensures compatibility and interoperability of natural gas and hydrogen networks while at the same time aims at enabling best possible connectivity between future supply and demand centres.

Assess the existing gas market regulation and amend relevant market rules to enable an appropriate regulatory framework for the internal hydrogen market.

Develop a target-model of a future hydrogen grid to provide orientation for infrastructure development, definition of strategic infrastructure corridors within TEN-E as well as the consequent selection of PCIs.

1.3. Functioning markets with tradable green products ▪ ▪

Use the ongoing strategy development processes to implement an EU-wide classification of climate-neutral gases based on the work already conducted in the context of Madrid Forum.

Introduce “Certificates of (avoided) emissions” - a certification system for climate-neutral gases that combines the features of Guarantees of Origin with Sustainability Certificates.

1.4. Renewable electricity as a key enabler of smart sector integration ▪ ▪

Extend the renewable energy financing mechanism to financing hydrogen generation facilities in combination with renewable energy plants.

Use the EU Offshore-Wind Strategy to introduce a methodology for carrying out joint European offshore-wind projects.

1.5. Support the development CO2-infrastructure ▪

▪

of

climate-neutral

carbon,

CCUS

technologies

and

Use the ongoing strategy development processes to lay down a foundation for a coherent regulatory framework for efficient carbon-cycles, which enables an effective recognition of sustainable use, capture and recycling of CO2 in the ETS framework.

Introduce a certification system for CO 2 and facilitate investments in climate-neutral carbon, CCS and CCU projects by making them eligible for sustainable financing.

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2. Market ramp-up of a sustainable hydrogen economy in the EU The German industry sees a central role for clean hydrogen in achieving climate-neutrality in Europe.

However, the end-use of clean hydrogen is currently not competitive to fossil-based options. This holds for the operational costs as well as in many cases also for the investments associated with a switch to hydrogen-based processes, not to undermine the investments needed to build a competitive hydrogen production sector in Europe. Therefore, we urge the EU Commission to address the market ramp-up of hydrogen in its Hydrogen Strategy and would like to particularly emphasize the following measures.

2.1. Use IPCEIs for establishing a competitive hydrogen economy As already pointed out in the EU Industrial Strategy, Important Projects of Common Interest (IPCEI) provide for a great potential for supporting the establishment of a competitive hydrogen economy in Europe. As BDI we support the Commission’s plan to revise State aid rules for IPCEIs in 2021 and to allow for a full participation of SMEs in future IPCEIs. Against this background we also welcome the inclusion of hydrogen as one of the Strategic Value Chains of Strategic Forum.

2.1.1.

IPCEIs for hydrogen transport and import infrastructure

Several cross-border hydrogen infrastructure projects have already been presented in the meetings of the Strategic Forum such as “Green Spider” or “Green Flamingo” 7. These project proposals go into the right direction as they address an obvious market failure: a single private company will not be able to enable and manage a cross-border cooperation between relevant TSOs in several Member States with (as for today) diverging regulatory frameworks for hydrogen transport networks.

The selection and planning of projects aimed at developing hydrogen transport infrastructure as well as the respective definition of strategic infrastructure corridors within TEN-E should be aligned with a target-model of a European hydrogen grid (see section 1.1.) as well as the future import strategy for renewable energy carriers of the EU (see Chapter 4).

Thereby, the pipelines as well as the necessary infrastructure at harbours (e. g. re-gasification plants) should be planned in accordance with the inner-European hydrogen trade potentials as well as the external import relations with non-EU countries (e.g. Mena-region, Ukraine, Russia; Saudi-Arabia, Australia).

2.1.2.

IPCEIs for electrolyser and fuel-cell production

In our view, IPCEIs should be increasingly implemented to support industrial-scale production of technologies crucial for a hydrogen economy – electrolysers and fuel-cells. Large-scale investment support for these technologies is key to defending the position of the European producers in international competition with China, South Korea and Japan, where state-aid plays a crucial role in supporting the hydrogen industry.

Therefore, in the context of the planned European Clean Hydrogen Alliance the above-mentioned hydrogen technologies should receive a support at least comparable to the European Battery Alliance where the cumulated state aid makes up EUR 3.2 billion or almost 40 percent of the total investment.

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https://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupMeetingDoc&docid=39534

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2.2. Implement instruments to support clean hydrogen use in the industry sector Hydrogen has the potential of becoming an effective option for CO 2-reduction in all sectors. In the energy intensive industries, however, hydrogen to date often represents the only available alternative, especially if policies limit the use of CCUS technologies 8. Therefore, the BDI welcomes the prominent role of energy intensive industries in the roadmap of the Commission for the EU Hydrogen Strategy.

To bring clean hydrogen to scale in the energy intensive industries an effective policy mix is required.

We urge the Commission to particularly focus on the following instruments.

2.1.1.

Industry-Contracts-for-Difference

Contracts-for-Difference (CfD) have been recently a subject of political discussion in the EU. CfD is an instrument to cover differential costs of new technologies. Under a CfD model companies receive project-related financial support for a certain period (e.g. 20 years), which can be methodologically determined, on the basis of individual contracts.

The BDI sees a strong need for an instrument which could support the industries in bridging the cost gap between fossil-based and CO2-neutral industrial process. Therefore, we generally support the concept of CfD. However, the success and the impact of this instrument on the international competitiveness of the European industries will strongly depend on its design.

In addition, it is important to consider the pace of the transformation which can be enabled by CfDs. Considerably higher CO2-prices in EU ETS would potentially improve competitiveness of low-carbon technologies in Europe. However, as long as the global ambition level strongly differs and the required transformation of the industry sector is still under way, high CO 2-prices in EU ETS provide for an increased carbon-leakage risk. Therefore, the implementation of CfDs must go hand-in-hand with carbon-leakage-protection instruments.

In the following we present our view on some of the key elements of an effective design for a CfD model which would enable the required transformation of the industry sector – “Industry-Contracts-forDifference”. We also call on the Commission to conduct a comprehensive analysis of the potential design options as no systemic examination on this topic has been accomplished yet.

Geographical scope: In our view, both national as well as EU-wide Industry-CfD schemes should be introduced. Yet, the regulation of the European internal market speaks in favour of harmonised EU-wide rules to be implemented for the national schemes.

Sectoral scope: In regard to the transformation towards hydrogen-based processes in the energy intensive industry in the first step we see the necessity of Industry-CfDs in the following sectors: ▪ ▪ ▪ ▪

Chemistry Steel Cement Glass

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It has to be kept in mind that the use of hydrogen alone cannot fully mitigate emissions in all sectors. In particular for process emissions CCUS remains an indispensable technology to reach the climate targets.

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In the next step the CfDs should also be applied in other energy intensive sectors.

To account for structural differences between these different sectors we consider technology-specific approach to represent the instrument of choice.

Determining the scope of support: In current literature9 the level of CfD for industrial processes is often determined as the difference between the “strike price” – the CO2-price required for a given technology to be cost-competitive – and the average EU ETS price. We are not convinced of the effectiveness of this approach as it only partly addresses the actual differential costs of low-carbon industrial processes and therefore disregards the competitive gap to regions without carbon pricing.

Instead, to determine the differential costs the reference costs of a new technology in a particular project, which include investment costs (e.g. CAPEX of a direct reduction plant) as well as operational costs (e. g. clean hydrogen costs), should be compared with the reference costs of the incumbent technology. Only then a CfD can appropriately address the differential costs associated with low-carbon technologies.

Selection procedure: To select the projects eligible for CfD support the BDI speaks in favour of technology-specific criteriabased application processes for each sector. Thereby we oppose the implementation of auctions or tenders at this early stage of market ramp-up. The level of financial support under Industry-CfDs should remain constant over the contracted period. Prospectively an indexation of the support level on the price of clean hydrogen should be considered.

To enable an effective selection process for a project to be granted a technology-specific Industry-CfD a comprehensive set of criteria should be implemented such as: ▪ ▪

▪

CO2-abatement costs of a project and the expected CO2-abatement contribution Integration into industrial value chains: - Transport and logistic costs, including connectivity between hydrogen demand and supply centres - Infrastructure development and availability (e.g. electricity, hydrogen and CO2 grids) Investment cycles of the industrial site in question (if applicable)

By considering a comprehensive set of criteria the hydrogen economy can be effectively integrated into the existing industrial value chains leveraging synergies within the internal market. In a mediumto long-term perspective the objective of the CfD model is to incentivise and support the transformation of the entire sector and not just to favour a couple of “champions” able to implement the projects at the lowest costs possible.

2.2.1.

Green public procurement

The government and public-sector companies are large consumers of basic materials through construction and logistics/transportation activities (especially for infrastructure development). As a demand-pull-instrument mandatory green public procurement could create reliable outlet markets for sustainably produced building materials such as low-carbon steel or cement and sustainably manufactured

For instance „Decarbonising basic materials in Europe: How Carbon Contracts-for-Difference could help bring breakthrough technologies to market”. Science Po 2019.

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consumer products such as vehicles or trains, thus effectively complementing support schemes such as CCfD. 2.2.2.

State-aid framework

To facilitate the market ramp up of clean hydrogen use in the industry sector we recommend establishing a dedicated chapter on state aid for low-carbon technologies within the Guidelines on State aid for environmental protection and energy. This new chapter should in our view include the following elements: ▪ ▪ ▪ ▪ ▪

Implement significantly higher state aid intensity for climate-neutral technologies in large scale installations; Allow cumulating the maximum aid also based on a reasonable financing gap analysis rather than only on a rigid eligible cost approach; Enable a considerably stronger OPEX support; Enable faster and simpler notification procedures; Increase notification thresholds for climate neutral technologies to € 200 million.

In addition, on the national level the state aid for low-carbon technologies must be ensured in such a way that no individual approvals from the EU Commission are required or, alternatively, the aid approval is granted without lengthy individual review if certain minimum requirements are met. The GBER (General Block Exemption Regulation) needs to be adapted accordingly.

2.3. Leverage the market ramp-up potential of the transport sector In comparison to other sectors the transport sector, especially the passenger road transport, provides for the highest willingness to pay. Yet the potential of this sector for supporting the market ramp-up of hydrogen and renewable synthetic fuels of non-biological origin (in the following short “renewable synthetic fuels”) currently remains largely untapped. Especially in times of the economic recovery post Covid-19 pandemic the EU Commission as well as the Member States should try to leverage most of the existing market potential.

At the same time, renewable synthetic fuels as well as the biofuels play an important role in the transition to low-carbon mobility. Especially aviation, maritime and long-haul freight transport as well as the majority of passenger cars in 2030 will depend on liquid fuels. In addition, there are many niche sectors which do not allow a usage of battery or fuel cell technology. Either because the machine is limited in its dimensions or weight or because there is no chance of covering development costs for special applications. Examples for this are mobile machinery or agricultural machines.

Therefore, every option that leads to a market ramp-up of renewable synthetic fuels should be pursued. Furthermore, the need for subsidies for aviation and maritime can be reduced by introducing renewable synthetic fuels in the segments with the already existing regulation, which are characterised by a higher willingness to pay (in particular passenger road transport).

To exploit the potential of renewable synthetic fuels in all segments of the transport sector a concise regulatory framework is required. The Smart Sector Integration and the EU Hydrogen Strategy should therefore address the following elements.

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2.3.1.

Introduce common principles for production of renewable transport fuels

Article 25 of RED II defines the minimum share of renewable energy which Member States must achieve in the transport sector at 14 percent. Thereby it also opens the opportunity for the Member States to allow the recognition of green hydrogen in refinery processes as well as of renewable fuels of non-biological origin towards achieving this target. As BDI we strongly support this measure as it creates an attractive business case and therefore has a great potential of supporting the hydrogen market ramp-up phase.

However, the regulatory framework for enabling this recognition is currently unclear. Article 27 of RED II sets the calculation rules with regard to the minimum shares of renewable energy in the transport sector. According to subparagraph 7 of paragraph 3 of article 27 of REDII by 31 December 2021, the Commission shall adopt a delegated act to establish detailed rules by which producers of renewable liquid and gaseous transport fuels of non-biological origin can claim to be using fully renewable electricity in the production of their fuel. Against this background recital 90 of RED II states four relevant criteria: renewable origin, temporal and geographical correlation, additionality.

In general, we support the objective of the Commission to lay down common principles. However, we would also like to point out towards some difficulties regarding the chosen approach.

Firstly, we would like to emphasize that the lack of the common methodology provides for insecurity among investors and that the required investments in electrolyser technology won’t be made as long as the methodology is not adopted. Therefore, the adoption of the methodology only by 31 December 2021 would significantly postpone the only investments in electrolyser technology which are currently cost-competitive from the market perspective. Thus, we urge the Commission to adopt the methodology already in 2020 and introduce this measure as a key action in the EU Strategy for Smart Sector Integration.

Secondly, whereas the chosen criteria are certainly reasonable in the long-term perspective, we consider it to be too restrictive for the market ramp-up phase. In our view, under the current conditions of electricity and hydrogen network expansion only few locations in the EU will be able to fulfil all four criteria to full extent. At the same time, we consider policy makers to be in charge of ensuring that renewable energy generation meets the growing demand of economy. This responsibility cannot be offloaded onto the energy consuming sectors with additionality criteria. The methodology outlined in RED II could thus become a substantial hurdle towards the market ramp up of electrolyser technology in Europe.

Therefore, we suggest that in the short term the above-mentioned four criteria should be substituted by the following concept: 1. The Member States should be encouraged to introduce additional renewable energy expansion corridors dedicated to supplying renewable electricity for hydrogen production.

2. The operators of fuel production plants should be obliged to prove the renewable origin of the electricity by obtaining electricity GOs. As the hydrogen market develops, the concept can be extended by introducing further elements and criteria.

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2.3.2.

Use the review of the RED II to introduce dedicated incentives for green hydrogen and renewable transport fuels

Article 25 (1a) of the Renewable Energy Directive II (2018/2001/EU) opens an opportunity to recognise the use of green hydrogen in refinery processes and renewable synthetic transport fuels of non-biological origin towards the renewable energy target in the transport sector (minimum of 14 percent). The BDI considers this policy to represent a massive opportunity for scaling up green hydrogen production at large scale. However, there are currently no dedicated incentives for green hydrogen and renewable transport fuels of non-biological origin, making them one of the least favourable fulfilment options towards the transport sector target.

Against this background, the BDI calls on the Commission to use the review of the RED II scheduled for June 2021 to introduce a more ambitious renewable energy target in the transport sector as well as dedicated incentives for green hydrogen and renewable synthetic transport fuels.

There are a multitude of available technologies and possible strategies as well as different abilities of the market participants to introduce green hydrogen and other renewable synthetic fuels to the market.

For this reason, BDI calls for a flexible approach rather than a rigid, technology-specific sub-quota.

Crediting renewable synthetic transport fuels with different multipliers would better differentiate them from conventional fulfilment options while allowing for dynamic competition between different approaches and thus a more robust and efficient market ramp-up.

Refineries play a crucial role for scaling up the use of green hydrogen and renewable transport fuels of non-biological origin. Integrating green hydrogen and other renewable feedstock into the existing infrastructure and processes (“co-processing�) can replace fossil-based inputs in an efficient and scalable way. A large-scale use of this approach is, however, only feasible in a cost-effective way if it can be fully accounted for in the fuel sector (and not proportionately for all outputs of the refinery). BDI therefore calls for implementing a flexible mass balance accounting approach that allows fuel suppliers to fully credit the use of green hydrogen and other renewable feedstock in refineries towards the RED II obligations in the transport sector.

Furthermore, additional measures should be considered. Firstly, the required amounts of green hydrogen and renewable synthetic transport fuels of non-biological origin should be available to the market.

This means, that already in the short-term Gigawatt-scale production facilities of green hydrogen and renewable fuels should be supported. In addition, the establishment of international hydrogen supply chains should be pursued already in the short term (see Chapter 4).

Secondly, not only green hydrogen in the refinery processes but also of renewable transport fuels brought into the market by the companies should be recognised.

Last but not least, there should be legal certainty on the methodology for production of renewable transport fuels mentioned in the above section (Art. 27 RED II). Only a flexible methodology which accounts for the current state of the market development in regard to the scale-up of hydrogen production facilities and related infrastructure can enable the necessary market ramp-up of hydrogen production and use in the refinery sector.

2.3.3.

Enable the recognition of renewable synthetic fuels towards achieving the fleet reduction targets

Current regulatory framework does not allow for recognition of renewable synthetic fuels for achieving the EU fleet reduction targets. Thereby a great potential of industrial-scale hydrogen production

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remains untapped while at the same time a viable technological option for CO2-reduction in transport sector is being blocked.

Therefore, we urge the Commission to include renewable synthetic transport fuels as an option for achieving the fleet reduction targets in the context of the planned reviews in 2022 (heavy-duty vehicles) and 2023 (cars & vans).

In our view the Commission should stick to the original time plan in regard to the review processes.

Both regulations set very ambitious targets that pose a great challenge for the manufacturers of cars, vans and heavy-duty vehicles. Initiating a review process for cars and vans already in 2021 in order to tighten the only shortly agreed fleet reduction targets would increase the current investment insecurity caused by the Covid-19 crisis.

2.3.4.

Use the revision of the Energy Taxation Directive to incentivise renewable synthetic transport fuels

The planned revision of the Energy Taxation Directive within the framework of the European Green Deal provides an opportunity to promote the development of CO 2-neutral transport and heating fuels.

Thus far, the Energy Taxation Directive does not include provisions for the exemption or reduction of energy taxation for renewable synthetic transport fuels but treats them as fossil fuels. Member States can although apply for a temporary exemption under Art. 19.

As part of the revision of the Energy Taxation Directive, a derogation for CO2-neutral fuels should find application at the stage of market ramp-up, thus facilitating the boost of these fuels in the road transport. Thereby a smart carbon pricing can differentiate between the European minimum tax rates for transport fuels and additional national components on basis of fuel specific CO 2-emissions. A complete tax exemption for renewable transport fuels, to stimulate the market ramp-up, should become a central element of the revision.

2.3.5.

Foster Sustainable Aviation Fuels (SAF)

It is crucial to produce CO2-neutral synthetic fuels at competitive prices for the use in all transport modes. Regulatory measures and substantial subsidies for clean hydrogen production as well as demand-side incentives are necessary to reduce the current high costs of the production of clean hydrogen and renewable synthetic fuels. The production cost of sustainable aviation fuels (SAF) 10 is currently at least five times as high as that of conventional jet fuels and renewable synthetic fuels of nonbiological origin have not been available in sufficient quantities thus far. The right framework can help to promote the industrial scaling of renewable synthetic fuels for the aviation sector EU-wide, thus avoiding market distortions within Europe.

As aviation is already part of the EU ETS, one approach to financing the gap between fossil fuels and SAF could be a harmonisation of existing national aviation taxes at European level by implementing an EU-wide aviation climate levy. Such a levy regime needs to be passenger, destination, and distance related to have a levelling effect for all airlines operating in Europe and to avoid market distortions.

Furthermore, it should have an element to capture outbound and inbound travel. A certain share of funds should come from budget resources accrued from these common EU aviation levy revenues to

„Sustainable aviation fuels (SAF)� is a definition used in the aviation sector to include both renewable synthetic fuels and advanced biofuels.

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be used for production and market introduction of electro-fuels11 in the aviation sector in order to scaleup and to subsidize the production to a fair market price.

An EU-wide blending obligation for CO2-neutral synthetic fuels implemented gradually could be a viable approach to facilitate the scale up of these fuels with their climate benefits across the EU, but only if the costs of SAF that are many times higher than regular jet fuel are subsidized to compensate the difference as mentioned before. This is the only way to avoid substantial market distortions in an international sector such as aviation and create a roughly same level playing field between European and non-European airlines.

On the other hand, the need for subsidies for aviation can be reduced by using sectors with already existing regulations, which have a high willingness to pay for the market ramp-up. While the Energy Taxation Directive contains provisions with the ability to favour certain types of fuel, the impact of these incentives on sustainable aviation fuels’ supply and demand is limited. The aviation sector would benefit from an approach of sector integration as the price for renewable synthetic fuels would decrease when fuel producers can market their products to different customers across the transport sector.

2.4. Consider the future potential of hydrogen in the building sector By improving efficiency, a large share of CO2 emissions in the buildings sector can be abated. To fully decarbonise the remaining energy consumption, the implementation of climate-neutral gases and especially for rural areas also fuels will be required in addition to direct electrification.

In the EU, 130 million installed gas heaters could strongly contribute to CO2 reduction, if natural gas could be prospectively substituted with clean hydrogen and/or other decarbonised and renewable gases. The opportunity to use the existing gas network also implies that no change in consumer behaviour is required in order to achieve an effective CO2-reduction.

The heating sector is one of the largest consumers of natural gas. Therefore, considering the above mentioned the potential demand of the buildings sector should be taken into account when developing a European Hydrogen Strategy and the import strategy of the EU for renewable energy carriers (see Chapter 4).

2.4.1.

Recognise the potential of modern gas-based heating systems

Various projects are currently ongoing to test the existing appliances for their tolerance towards the use of hydrogen (e.g. DVGW Avacon in Germany12; THyGA project in the EU13). Preliminary results demonstrate that with minor technical adjustments modern gas heating appliances can ensure a safe, efficient and low emission operation with a hydrogen blending of up to 30 percent. Parallel developments for the use of 100 percent hydrogen in the heating sector have also been started.

An increase in the market share of hydrogen-compatible products in addition to the existing heating systems can contribute towards the market ramp-up of renewable gases in the EU. Thereby the existing gas infrastructure can be used. It enables the distribution of renewable gases to gas condensing

11

„Electro-fuels“ correspond to „renewable synthetic fuels of non-biological origin” in the logic of the position paper.

12

https://www.dvgw.de/themen/forschung-und-innovation/forschungsprojekte/dvgw-forschungsprojekt-h2-20/ https://thyga-project.eu/

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boilers, gas heat pumps, mCHPs, fuel cells and hybrid technologies among other options leading to a reduction in CO2 emissions in the heating sector, without affecting the user behaviour.

Against this background, policies for the market transformation of gas-using appliances under ecodesign and energy labelling are needed. These should ensure that the majority of future installed end-use appliances are capable of processing hydrogen-methane blends or pure hydrogen. Mandatory ecodesign requirements for hydrogen blends for gas boilers are under discussion and should introduced (value could be around 20 to max. 30 vol percent). This is a no-regret measure for users.

2.5. Create a perspective for hydrogen in power generation In addition to industry, transport and buildings, the perspective of using of clean hydrogen in power generation should not be overlooked. In a climate-neutral energy system there will be no room for fossil fuels in power generation. At the same time, the demand for baseload in a system dominated by renewable power generation is expected to stay close to today’s level 14. Therefore, the baseload power plants will prospectively have to run on climate-neutral gases. Hydrogen-readiness of new gas turbines and retrofit-solutions will thus ensure that investments in gas power plants do not produce stranded assets. In the same way, such measures contribute to a cost-efficient transition, where existing gas assets continue to be used – even if some adaptations may be needed.

Already today clean hydrogen can help balancing electricity demand and supply, not only when there is oversupply of electricity, but also when supply is lower than demand, ensuring security of supply with thermal power – with the help of power plants operating with hydrogen, providing clean power supply with turbine technologies. In cogeneration applications, the use of hydrogen does not only help in the efficient and sustainable supply of power and heat/cold but also helps decarbonising the heating and cooling sector.

As such, power generation should be adequately covered in the EU Hydrogen Strategy as part of the hydrogen value chain and recognised as one of the potential end-use applications.

As demonstarted in one of the studies of the German Academy of Science and Engineering: Acatech (2017). „Sektorkopplung“ – Optionen für die nächste Phase der Energiewende.

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Summary of key recommendations Chapter 2 2.1. Use IPCEIs for establishing a competitive hydrogen economy ▪ ▪

Leverage the potential of IPCEIs for cross-border hydrogen infrastructure projects as well as for supporting industrial scale production of electrolysers and fuel-cells.

Make sure that the support for hydrogen technologies is at least comparable to the European Battery Alliance.

2.2. Implement instruments to support clean hydrogen use in the industry sector ▪ ▪

An effective policy mix includes national and EU-wide Industry-Contracts-for-Difference models, green public procurement and an extended European state-aid framework.

The effectiveness of a CfD model will strongly depend on its design. The BDI speaks in favour of technology-specific criteria-based application processes with the level of financial support being determined as the difference between the reference costs of a new technology (CAPEX and OPEX) and the reference costs of the incumbent technology.

2.3. Leverage the market ramp-up potential of the transport sector ▪

▪

▪

▪

The upcoming reviews of the fleet reduction targets, the Energy Taxation Directive, the RED II should be used to enable the recognition of and introduce dedicated incentives for green hydrogen and renewable transport fuels.

Introduce common principles for production of renewable transport fuels as envisioned

by Art. 27 of RED II. Instead of a rigid methodology based on the criteria suggested by Recital 90 we speak in favour of a concept in which the Member States are encouraged to introduce additional renewable energy expansion corridors dedicated to hydrogen production, whereas operators are obliged to prove the renewable origin of the electricity with GOs. An EU-wide blending obligation for SAF in aviation sector implemented gradually could be a viable approach to promote the industrial scaling of SAF, but only if the costs of SAF are substantially subsidized to avoid market distortions.

The need for subsidies in aviation can be reduced by leveraging the market ramp-up potential of the transport sector as a whole by including fields with already existing regulation and a high willingness to pay (e.g. road transport).

2.4. Consider the future potential of hydrogen in the building sector ▪

▪

To fully decarbonise the energy consumption of the buildings sector climate-neutral gases and fuels will be required in addition to direct electrification and energy efficiency measures. This potential demand should be taken into account when developing a European Hydrogen Strategy.

Policies for the market transformation of gas-using appliances under ecodesign and energy labelling are needed. These should ensure that the majority of future installed end-use appliances are capable of processing hydrogen-methane blends or pure hydrogen.

2.5. Create a perspective for hydrogen in power generation ▪

▪

In a climate-neutral energy system the baseload power plants will be operated on climateneutral gases. Hydrogen-readiness of new gas turbines and retrofit-solutions will thus ensure that investments in gas power plants do not produce stranded assets.

Power generation should be adequately covered in the Hydrogen Strategy as part of the hydrogen value chain and recognised as one of the potential end-use applications.

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3. Efficient and smart use of resources 3.1. Reassess the definition of energy efficiency The German industry strongly supports the principle of efficiency-first. With energy efficiency measures a significant reduction in energy consumption and CO2 emissions has already been achieved, decoupling economic growth from energy consumption in Europe. Further energy efficiency potential in all sectors of the economy is yet to be leveraged.

However, with a roll-out of a sustainable hydrogen economy in Europe the definition of energy efficiency needs to be re-evaluated. Indisputably, direct electrification offers a more efficient way of using renewable energy in comparison to the production of hydrogen and its derivatives. Yet, this reflects only a narrow view on the issue of energy efficiency as the energy efficiency is not the only and also not the key evaluation criteria in hydrogen applications.

Firstly, the use of hydrogen opens decarbonisation options for hard to abate emissions. Secondly, it makes renewable electricity storable and transportable. At this upstream level of energy delivery, the production of hydrogen and its derivatives can realize major advantages over direct electrification pathways and significantly compensate the often-assumed efficiency-gap. An aspired European and global hydrogen economy enables the use of world’s best renewable energy locations, which would not have been accessible for direct electrification. At the same time, the efficiency of generating hydrogen and its derivatives at such locations significantly exceeds the efficiency rates possible at locations in Europe as demonstrated in the figure below.

Figure 6: The efficiency of hydrogen and E-Fuels in relation to the place of production.

Source: Power-to-X-Allianz (2020).

In addition, with a switch to hydrogen-based processes the benchmarks for energy efficiency in some industrial processes will need to change. For example, the steel mills in Germany are operating at their efficiency maximum providing for a strong circularity of their production processes. Nevertheless, the process itself remains CO2-intensive. If the steel industry switches to direct reduction plants (DRP), the entire production process will need to be reorganised, which might result in a higher energy intensity outcome.

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Therefore, an undifferentiated definition of energy efficiency might stand in contradiction to deep decarbonisation of the European economy as well as to smart sector integration. We urge the Commission to reassess the definition of energy efficiency against its validity in a sustainable hydrogen economy.

3.2. Launch a “smart” buildings renovation wave The BDI considers the European Commission‘s initiative for a ‚renovation wave‘ as part of the EU Green Deal to be crucial for reducing emissions in the buildings sector. There is an urgent need for a more comprehensive building refurbishment, in which both the building envelopes and building heating systems are renewed. In Germany alone, approx. 50 percent of heat generators are more than 20 years old. Additional investment incentives from the European level are urgently needed to mobilise the CO2 saving potential as quickly and comprehensively as possible. At the same time, a renovation wave can provide an important stimulus for the economic recovery post Covid-19 pandemic. Economic recovery plans should introduce/increase support for clean and smart heating technologies: photovoltaics, batterie storage, heat pumps, thermal storage, self-consumption, heat generator hybrids, and heat pumps with smart demand side management functionality. These technologies are a stepping stone and no regret for staged deep renovation on the way to a decarbonized building sector.

3.2.1.

Strengthening European promotion-related activities for climate protection in the buildings sector: European Investment Bank (EIB) and European Regional Development Fund (ERDF)

From BDI’s point of view, it should be examined how investment activities of the European Investment Bank (EIB) to promote energy efficiency in the buildings sector can be strengthened and further expanded. This includes, for example, the EIB's activities for indirect financing of energy efficiency projects through investment funds and for facilitating contracting.

Similarly, consideration should be given to how activities for promoting energy efficiency in the buildings sector could be strengthened and expanded with the European Regional Development Fund (ERDF). An example is the necessary expansion of the heating networks, which is a central lever for efficient reduction of CO2 emissions in the buildings sector.

3.3. Enable an efficient use of waste energy in all sectors 3.3.1.

Making the best use of combined heat, cooling and power generation

Controllable backup capacities for combined heat, cooling and power generation are an essential component of an integrated energy system. Highly efficient gas-fired combined heat and power plants (CHP) integrated in industrial sites is the technology of choice in this regard, since it combines controllable generation with energy-efficient and thus ecologically advantageous provision of electricity and heat. Furthermore, combined heat and power plants can be integrated into the sector coupling, for example using power-to-heat, and thus enable synergies.

An important feature of an integrated energy system is the utilization of residual heat and gaseous residues, which is made possible by combined heat, power and cooling (synergy with energy efficiency measures) integrated in heating-cooling networks. By integrating absorption refrigeration, residual heat can also be used for cooling. In addition, CHP is compatible with climate-neutral gaseous fuels, which can further increase their ecological advantages. The promotion of cogeneration and heating / cooling networks should be further expanded to increase the above-mentioned synergy potential.

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3.3.2.

Enable an efficient use of industrial waste heat

A number of industrial processes produce waste heat, e. g. chemical parks, metal processing as well as data centres. The use of this heat within the industrial site, for instance for processes and building heating purposes, represents a viable economic option and is widely applied in (see above). However, not all the waste heat can be utilised in this way. The feed-in of the remaining waste heat into a district heating system represents another utilisation option which yet to be implemented more broadly as currently some regulatory barriers prevent its widespread use. Thereby, a great efficiency potential remains untapped.

Therefore, we consider the following measures to be crucial to remove existing barriers and create a framework which would enable an efficient use of industrial waste heat: ▪

Incentivise the expansion of heating grids in urban areas: For a comprehensive expansion of the heating grids, the appropriate framework conditions and suitable funding instruments are needed. Particularly in urban areas, there is a great untapped potential for further district heating expansion.

▪

Reform of the levy system for heat pumps: Heat pumps are generally used to make use of the waste heat from data centres in order to bring the temperature to the level of the heating grid and to compensate for fluctuations in waste heat generation. The use of heat pumps in combination with other heat generators should therefore be exempted from grid charges, and the electricity tax and levies should be reduced.

▪

Improve the municipal heat utilisation planning: The recording of waste heat potentials and waste heat sinks is in part already well advanced. In several Member States heat maps with waste heat potentials already exist. These heat sources should also be integrated into municipal heat use planning. The objective should be a strategy for the most cost-effective climate-friendly heat supply for the entire municipality. This would require a comprehensive inventory and definition of the development steps for a climate-neutral heat supply of the municipality (supply areas, types of generation, network development).

▪

Reforming the combined heat and power framework: The use of waste heat and renewable heat must be financially at least as profitable as the use of heat from fossil-fuelled combined heat and power plants, which will continue to play a role as a bridging technology.

▪

Rewarding carbon neutral uses: From the established production processes of the steel industry, waste gases result and can be further used in other processes, thereby reducing emissions through lowering additional need for other combustibles such as natural gas. Such emission-efficient waste gases should be in general acknowledged as carbon neutral fuels and their use – as well as the use of waste heat – should be generally exempted from any burdens by energy and CO2 levy and regulation.

▪

Consider industrial waste heat in the overall system: The use of waste heat sources in the building itself has priority from an economic point of view. This is because the technical and financial outlay for this is much lower than for feeding into a district heating network. When feeding into the grid, the available waste heat quantity and its performance must be considered and evaluated in a time-differentiated manner. This is because many district heating systems already have surplus CO2-free heat in the summer months, so that the absorption of waste heat during these times would not represent any added value. Industrial waste heat not usable

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for industrial on-site purposes could be considered an option to optimise the interaction of existing heat sources, heat from renewable energies and heat storage.

▪

Financial support for the connection of more remote plants: In order to be able to connect more remote locations with large waste heat potentials to the district heating network, government support for the construction of the pipelines should be made available after corresponding feasibility studies. Projects with district heating supply pipelines, some of which are over 30 km long and have losses of less than 1°C, demonstrate the feasibility of such projects.

Summary of key recommendations Chapter 3 3.1. Reassess the definition of energy efficiency ▪ ▪

An undifferentiated definition of energy efficiency might stand in contradiction to deep decarbonisation of the European economy as well as to smart sector integration.

We urge the Commission to reassess the definition of energy efficiency against its validity in a sustainable hydrogen economy.

3.2. Launch a “smart” buildings renovation wave ▪

▪ ▪

The effectiveness of the “renovation wave”, also in terms of smart sector integration, strongly depends on its design. Additional investment incentives from the European level are urgently needed to mobilise the CO2 saving potential as quickly and comprehensively as possible.

It should be examined how investment activities of the European Investment Bank (EIB) to promote energy efficiency in the buildings sector can be strengthened and further expanded.

Similarly, consideration should be given to how activities for promoting energy efficiency in the buildings sector could be strengthened and expanded within the European Regional Development Fund (ERDF).

3.3. Enable an efficient use of waste energy in all sectors ▪

▪

The promotion of combined heat, cooling and power generation should be further expanded to increase the utilization of residual heat and gaseous residues and therefore pursue smart sector integration.

Remove regulatory hurdles for feeding-in industrial heat into the district heating systems and allow for a more widespread use of this efficiency option.

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4. EU import strategy for renewable energy carriers As outlined in previous chapters, clean hydrogen and its derivates will be at the centre of achieving climate-neutrality in the EU, resulting in a huge demand. Just to take the German example, current estimates suggest a demand corridor for hydrogen between 380 TWh, in a scenario with a use of CCS for industrial process15, up to 905 TWh in a scenario which excludes CCS and provides for a widespread use of hydrogen and its derivatives in all sectors 16.

With currently less than 20 percent of the primary energy consumption being covered by renewable energy, it is obvious that Germany won’t be able to meet the described demand with the domestic market only. The development of an internal hydrogen market (see Chapter 1) offers a great opportunity to leverage the potential of an inner-European hydrogen trade, connecting demand and supply centres across Europe. However, even if the locations rich on renewable energy such as for example the North Sea, the Mediterranean or Southern Europe can strongly contribute to covering the European hydrogen demand, the inner-European production might still not be enough to meet the EU demand completely.

Therefore, besides the development of an EU internal hydrogen market, which has already been described in this paper, the BDI also sees a need for an EU import strategy for renewable energy carriers.

Such a strategy should provide an orientation for leveraging renewable energy generation potential of the world’s best locations and consequently integrating them into a global hydrogen market. Thereby, significant efficiency gains can be achieved and a tangible perspective for substituting oil and gas with a sustainable global hydrogen market can be created. The European producers could play a vital role in building and developing this global market, developing new projects for renewable energy generation worldwide that otherwise would not be realized because of lacking local demand, political will or profitability. Thus, the EU would be supporting decarbonisation efforts outside Europe.

Besides the obvious contribution of hydrogen imports towards achieving climate-neutrality, the development of international hydrogen value chains can become a central pillar of the European external energy policy as well as play a significant role in the foreign and development policy of the EU. Considered the above-mentioned we urge the Commission to develop a European import strategy for clean hydrogen and its derivatives as an integral part of a future Hydrogen Strategy of the EU. 4.1. Potential partners As demonstrated by the IEA (Figure 7), various world regions have the potential of becoming future hydrogen exporting countries and together building a global hydrogen market. The BDI sees the need of engaging in cooperation with a wide range of partners, leveraging specific advantages of particular regions and countries and building a foundation for a diversified import portfolio. Thereby the EU can set standards in international hydrogen trade (e. g. certification, standardisation, denomination of transactions) and play a key role in redefining the global energy landscape.

In addition to the categories discussed below also Latin American countries such as Mexico, Chile, Argentina or Brazil with their abundant renewable energy resources should be considered as potential partners for the EU import strategy.

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BDI (2018). Klimapfade fĂźr Deutschland.

Dena (2018). Dena-Leitstudie.

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Figure 7: Long-term hydrogen production costs in international comparison.

Source: IEA (2019). The future of hydrogen.

4.1.1.

Industrial countries and traditional energy exporters

The trade with industrial countries has several advantages such as a stable political framework and a good business environment. Existing import infrastructure and logistics add to that advantage, which is especially valid for today’s energy exporting countries. An obvious example for that is Norway. It does not only have abundant renewable energy resources, but it is also already interconnected to the European gas infrastructure. But also Russia and Saudi Arabia could transform their energy trade relations with Europe by switching to clean hydrogen production and export. Hydrogen partnerships therefore open new perspectives for traditional energy exporters, making them beneficial also in terms of foreign and security policy.

Other candidates in the category of industrial countries are Australia, Canada or Iceland. All have a great renewable energy potential and are taking first steps towards hydrogen production. Yet especially Australia and Canada are geographically far away from the EU. Considering such countries as potential partners would allow to explore the conditions under which long-distance maritime transport of renewable energy carriers is possible, which is a crucial element of a global hydrogen market. The EU could therefore set standards in this area.

Looking at G-20 also China has extensive renewable energy resources. Yet as a huge energy importer, it is uncertain whether China will explore its potential also for export or exclusively for domestic use.

4.1.2.

Members of the European Neighbourhood Policy 17

Integrating Members of the European Neighbourhood Policy into an EU import strategy has the potential to support the decarbonisation of the energy systems of these countries while also pursuing objectives of the external energy policy of the EU. Likewise, existing trade infrastructure – such as the gas

17

The countries covered include Algeria, Morocco, Egypt, Israel, Jordan, Lebanon, Libya, Palestine, Syria, Tunisia in the South and Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine in the East.

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pipelines connecting Southern Europe with Northern Africa as well as the gas pipelines to Ukraine can be an important facilitator to the new energy relations. In regards to the MENA region, the existing Africa-EU Energy Partnership which promotes shared projects on energy issues can be further developed to also include hydrogen projects.

Combined with abundant renewable energy potential, countries such as Morocco, Algeria, Egypt or Tunisia could play an important role as potential partners for an EU import strategy. Already in the short term, PtX production in North Africa and the Middle East has an import cost advantages of 27 percent.18 4.2. Instruments required to initiate an international hydrogen trade As of now there is no legal framework covering international trade for clean hydrogen and its derivates.

The first demonstration projects for hydrogen import to Europe are therefore associated with high risk and investment insecurity and require governmental support. Member States have a role to play here.

However, some topics like international certification standards or the rules for importing hydrogen into the internal energy market, can only be solved on the EU level. The EU could also play a vital role in financially supporting import projects carried out by several Member States and/or import projects benefiting the EU as a whole in the context of IPCEIs or by providing attractive credits of the European Investment Bank.

As the BDI we consider the following instruments and measures to be key to initiating the international hydrogen trade:

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International certification scheme: A harmonised international certification scheme will be required to prove and certify the origin of hydrogen and its derivatives produced outside the EU. An EU-wide classification and certification scheme discussed in this paper could serve as a basis for such an international certification system. The EU should pursue an early dialogue with potential partners on the export but also on the import side (e. g. Japan) in order to set the course for common standards for the international hydrogen trade and avoid fragmented approaches.

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Hydrogen partnerships and feasibility studies: Before large-scale imports can be carried out, feasibility studies with potential partners should be conducted in order to identify barriers and bottlenecks along the entire supply chain. The EU Commission could play a vital role for development of an international hydrogen market by supporting such feasibility studies and initiating dedicated hydrogen partnerships with third countries. The current framework of the energy partnerships can be applied here.

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Long-term supply contracts: Long-term supply contracts have played a major role in the development of the international gas and oil markets, eliminating insecurities on both demand and supply sides. A similar logic applies also for the development of a global hydrogen market and carrying out first large-scale imports between the EU and its Member States and the future hydrogen exporters. Long-term supply contract could enable and secure real business cases and allow for economically viable trade operations.

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Attractive credit conditions and financial support: The investment deal between the EIB and the EU Hydrogen Council is the first step in the right direction for funding hydrogen

Frontier Economics (2018): International aspects of a power-to-x roadmap. adelphi, dena, GIZ, Navigant (2019).

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projects. In future, EIB credits could be also granted for financing hydrogen import projects of the EU. In addition, the potential of the IPCEI instrument should be explored for financially supporting the import projects benefiting the entire EU. ▪

Expand the EIB’s field of activities to a broader list of countries: Today the EIB’s envelope for international project financing is strongly linked to a set of priority countries. However, the approach to priority countries is not aligned with climate considerations. To build a fully integrated energy system for climate neutrality, the EIB should support projects outside the EU aimed at importing renewable energy from the world’s most competitive locations for wind and solar energy. It should not matter whether the projects are in priority countries.

Summary of key recommendations Chapter 4 ▪

The BDI calls on the Commission to develop a European import strategy for clean hydrogen and its derivatives as an integral part of a future Hydrogen Strategy of the EU.

4.1. Potential partners ▪

▪

The BDI sees the need of engaging in cooperation with a wide range of partners, leveraging specific advantages of particular regions and countries and building a foundation for a diversified import portfolio.

Thereby the EU can set standards in international hydrogen trade (e. g. certification, standardisation, denomination of transactions) and play a key role in establishing a global hydrogen market.

4.2. Instruments required to initiate an international hydrogen trade ▪ ▪ ▪

The first demonstration projects for hydrogen import to Europe are associated with high risk and investment insecurity and require governmental support.

Some key issues such as rules for importing hydrogen into the internal energy market, can only be solved on the EU level.

The BDI considers the following set of instruments and measures to be crucial for initiating an international hydrogen trade: international certification scheme, dedicated hydrogen partnerships and feasibility studies, a framework for long-term supply contracts, attractive credit conditions and financial support.

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Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite StraĂ&#x;e 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0

BDI Department Energy and Climate Policy Dr. Carsten Rolle c.rolle@bdi.eu +49 30 2028 1595 Jekaterina Boening j.boening@bdi.eu +49 30 2028 1429 BDI Department Mobility and Logistics Petra Richter p.richter@bdi.eu +49 30 2028 1514

Document number D 1201

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