The EU must prioritise massive support for hydrogen R&D to reduce costs and avoid excess production subsidies

A report from the Florence School of Regulation (European University Institute) considers that the quicker costs are reduced by funding research and supporting demonstration projects, the fewer production subsidies will be necessary.The document supports the Commission’s Hydrogen Strategy on the use of the current gas infrastructure as the most cost-effective way of building the future hydrogen distribution grid.The authors argue that the cost of renewable energies will fall significantly by 2050 due to expected technological improvements

The EU’s Hydrogen Strategy must adopt a “cost-effective approach”, prioritising massive support for R&D and demonstration projects, followed by production subsidies in a second stage. This is one of the main claims of the Cost-effective decarbonisation study, drawn up by the European University Institute’s Florence School of Regulation and published by the Naturgy Foundation.

According to this document, the development of hydrogen must guarantee that greenhouse gas emission reduction targets are reached, but “it is equally important that they are implemented in an objective manner […] which is likely to lead to cost-effective decarbonisation”.

The study was carried out by Andris Piebalgs, former European Commissioner for Energy, and Christopher Jones, professor at the European University Institute, in addition to other authors.

The report upholds that the EU is at the start of a new “energy technology cycle with the development of the low and zero-carbon hydrogen market”. “As we have learned with the experience of developing the wind and PV markets, a key challenge to the cost-effective design of an energy policy at the beginning of a new technology cycle is timing: getting the balance right between initial R&D/demonstration of new technologies to lower costs, and creating demand through production subsidies”, maintain the authors.

Uncertainty due to widely varying cost data

The report establishes that data on the cost of hydrogen varies widely: “the very diversity of key data/predictions of future hydrogen costs contained in literature on the subject is in itself an important finding”. This “demonstrates the high level of uncertainty surrounding future hydrogen cost trends and the ETS prices needed to catalyse market penetration”.

In this context, the authors argue that “a ‘colour-blind’ policy approach to R&D/demonstration funding” must be applied. They maintain that “It is necessary to establish mechanisms “fully reflecting their externalities (notably GHG content) through life-cycle guarantees of origin” so that we have “ the most cost-effective energy transition”.

According to the report’s authors, the prices of different hydrogen technologies will be highly dependent on renewable electricity costs and the availability of this energy at a low cost, as well as on natural gas prices.

Bearing all of this in mind, the experts believe that “a logical approach would be to focus on blue [from natural gas with carbon capture] and turquoise [from natural gas through pyrolysis, which can produce low or zero emissions] hydrogen until 2030 and then focus on zero-carbon turquoise and green [through electrolysis using renewable electricity, zero carbon] hydrogen.”

Using the current gas network

The document also argues that “A key element to the development of a cost-effective future hydrogen system will be the existence of a hydrogen grid, which will be essential to lower the cost of hydrogen transportation, and prevent the emergence of entrenched monopoly positions”.

In this respect, the authors agree with the Commission’s Hydrogen Strategy and point out that “repurposing existing gas pipelines will be the most cost-effective basis of the future grid”.

For this purpose, the document also claims that “the basic provisions of the Internal Gas Market (unbundling, TPA, tariff regulation) will need to apply to the future EU hydrogen grid”.

Significant reduction in the cost of renewable energy by 2050

The study also analyses the expected costs of renewable electricity, which the authors assume will be “increasingly cheaper”. “Both onshore wind and solar PV are currently competitive with other electricity generation technologies”, they claim.

The document argues that, by 2030, there will be ”a significant decrease in the assumed average levelised costs for utility-scale solar, onshore wind and offshore wind […]. By 2050, the assumed range of levelised costs is expected to decrease further”. A larger CAPEX requirement due to expected technological improvements will be one of the keys of this anticipated cost reduction.

Naturgy Foundation

This new report is part of the activities that the Naturgy Foundation carries out on issues related to energy and the environment, based on serious and rigorous debate, with the fundamental objective of promoting the rational use of energy resources and encouraging sustainable development. Set up by the power company in 1992, the foundation is also engaged in social action programmes both nationally and further afield, by influencing particular initiatives aimed at alleviating energy vulnerability.

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