The Renewable Energy Sources Act
In 1999, a group of German parliamentarians drafted the Renewable Energies Sources Act, known as EEG, a simple but revolutionary policy that fundamentally transformed the renewable energy market. The EEG stipulated that anyone who constructed a renewable power plant, such as a solar PV project or a wind farm, would receive a 20-year cost-reflective fixed feed-in tariff.
Under the EEG, the local utility had an obligation to take the power and pay the tariff but could pass the cost differential on to the national high voltage grid and spread the cost over all German power customers. Since it was not a tax and spend mechanism, the EEG did not cost the government and proved to be politically robust, surviving several successive governments.
Looking back, the EEG was instrumental in unlocking the renewable energy revolution, as it played a critically important role in reducing the cost of renewable power worldwide. Along with the industrialization of solar PV production, policies like the EEG are ultimately responsible for the rapid growth of renewable capacity, which has reached more than 2TW globally.
Now, as the international community seeks to unlock similar success with new energy solutions, it would be wise to learn from the lessons of the not-so-distant past. After all, if the EEG can drive forward the cost-effectiveness of renewable energy, who is to say it could not do the same for hydrogen?
The business model for hydrogen
Despite the promise of inevitability and necessity, the bulk of hydrogen announcements are currently just that: announcements. In 2022 alone, more than 350 new large-scale hydrogen project proposals were announced, bringing the current number of large-scale proposals to more than 1,000. However, less than 10% of the $320bn of announced investments in all hydrogen projects through 2030 represent actual committed capital in the form of final investment decisions (FID).
At first glance, it may be difficult to decipher why investments have not turned into results. On the supply side, most project proposals are located where land is cheap and the resources are plentiful, thus ensuring low production costs. Meanwhile, demand for hydrogen seems solid, thanks in large part to incentives and other regulatory support, which aim to reduce emissions.
Moreover, the market also benefits from overarching targets laid down in national and regional hydrogen strategies, such as the Hydrogen Accelerator of the European REPowerEU strategy, which aims to support the development of 20 million tons of clean hydrogen by 2030. Several countries have also introduced specially designed mechanism to bridge the current financial gap between green hydrogen and other alternatives, including India’s production linked incentives, the USA’s Inflation Reduction Act and Europe’s Hydrogen Contracts for Difference.
With such a significant support system and a wide range of policies and regulations aimed at facilitating the expansion and competitiveness of the hydrogen market, only one question remains: what is missing?
Well, if we look at the example of Germany’s EEG, the answer seems to be simplicity and replicability.
A feed-in tariff for hydrogen
A simple feed-in tariff, like the one created by the EEG, would go a long way in making green hydrogen more accessible, thus giving a new lease on life and a far brighter future.
Already, Europe is equipped with an elaborate gas grid consisting of 200,000km high-pressure gas transmission pipelines and a distribution system stretching a multitude of that in length. When this system is gradually converted to handle hydrogen, the continent will be given a unique opportunity to inject hydrogen directly into the energy backbone of select countries and allow consumers access to their required hydrogen volumes, much like the natural gas system now.
However, until the hydrogen production costs can match the price of natural gas or unabated hydrogen, a clean hydrogen production tariff mechanism could bridge the gap, with a hydrogen clearing pool to distribute the cost among all gas clients. Most analysts predict renewable hydrogen to be the lowest-cost gas option latest by 2050 due to the learning curves of electrolysis and renewable electricity.
Such a legal framework, much like the EEG, would allow hydrogen producers to inject hydrogen into the natural gas grid for blending or into a pure hydrogen gas grid. They would be entitled to a 20-year hydrogen off-take agreement with a tariff ensuring a fair return on investment. The proposition is a typical utility return in the range of 10% in the beginning. The off-taker is either a TSO for large-scale high-pressure bulk hydrogen, a DSO for small-scale medium-pressure hydrogen or even a final industrial consumer, who can pass the marginal cost, the difference between the local hydrogen tariff and the market price for hydrogen, on to a hydrogen clearing pool. The marginal cost difference in the form of a renewable hydrogen surcharge is spread out evenly and fairly across consumers in the system, which can be regional or national. The hydrogen market transactions will be done via certificates that decouple the green quality from the physical molecules, enabling both grid-connected and decentralized solutions, in a fence-to-fence operation at a refinery for example. Of course, the devil is in the detail, and not all countries have the gas grid that Europe has. However, a certification scheme as described above, can help countries grow their hydrogen economies via smaller decentralized hydrogen valleys and eventually connect them with national infrastructure.
Through continued cooperation and collaboration between energy leaders in both the private and public sector, the hydrogen promise can become a reality. Already, we are seeing a concerted effort to galvanize the global energy industry around the incredible potential of hydrogen, with key policymakers and executives making strides towards developing hydrogen infrastructure. At major energy conferences around the world, hydrogen is occupying an increasingly prominent space. Take the example of Gastech 2023, a conference taking place 5-8 September 2023 in Singapore, which will host government and corporate leaders at a dedicated Hydrogen Forum and showcase new infrastructure projects that can help the rest of the world catch up with Europe.
The simplicity of the EEG kickstarted the renewable revolution. If we can learn from such practical solutions, coupled with a continued commitment to promote hydrogen and support infrastructure development, we may finally get the hydrogen train on the tracks it deserves.
Chairman – MENA Hydrogen Alliance
Co-President – Long Duration Energy Storage Council
Board member – Ammonia Energy Association
SVP New Energy – Reliance Industries Limited