Europe’s commitment to hydrogen is firm. Europe sees hydrogen as a solution to ensure energy security, increase the competitiveness of its industry and maintain leadership in decarbonisation efforts. In 2020, the European Hydrogen Strategy was adopted, which already set a target of reaching – by 2030 – 10 million tonnes of renewable hydrogen demand in the Union. To put this figure in perspective, this expected production of green hydrogen in 2030 is equivalent to all the hydrogen produced in Europe today by any method.
The energy crisis resulting from the invasion of Ukraine, which has led to extreme volatility in the price of natural gas, has accelerated the European uptake of hydrogen through the REPowerEU package, which complements and extends Europe’s hydrogen ambitions to double the target previously set in the strategy.
Following this trend, private investment in hydrogen-related technologies has also grown significantly in recent years. In 2022, global venture capital investment in the hydrogen sector was close to two and a half billion dollars, 13% and 225% higher than in 2021 and 2020 respectively, according to the Pitchbook database. Within this trend is the Next Technology Ventures II vehicle, Axon’s second fund within the energy transition vertical.
Hydrogen is an abundant element in our environment, although it is not found in its pure form and must be produced. The conventional method of producing hydrogen is to separate it from natural gas. This process is very carbon intensive and emits around 9 kilos of CO2 for every kilo of hydrogen produced, so in a year, this production generates, globally, emissions equivalent to those of the aviation sector. It can also be produced from coal, but this process is up to twice as polluting as natural gas. The alternative is to produce hydrogen from water, using a process known as electrolysis. Water electrolysis consists, in a very simplified way, of passing an electric current through water, separating the hydrogen and oxygen molecules that make up the water. This process, if powered by renewable electricity, would yield hydrogen with a reduced carbon footprint, generally referred to as green hydrogen.
The potential of green or renewable hydrogen to decarbonise different sectors of the economy is well known, with numerous studies showing that it can be a cost-efficient and scalable solution. This is one of the reasons why Axon sees great potential in Italian electrolyser manufacturer ErreDue, which is why Axon was the anchor investor in its recent IPO on Euronext Growth Milan. In this context, hydrogen could be the solution to decarbonise those energy uses where direct electrification is not the best solution.
However, while hydrogen can be produced with a reduced carbon footprint by combining water electrolysis and electricity from renewable sources, it is important to be able to ensure that this is the case. There is no point in connecting an electrolyser to the grid at times when electricity is generated from natural gas or coal. It is also not enough to connect an electrolyser to the grid and buy electricity from renewable sources, it must be produced at the time of use. If there is no time correlation to ensure that the electricity fed into the electrolyser comes from renewable sources, that hydrogen cannot be defined as green hydrogen.
To ensure this, it is essential to define what is considered ‘green’ or ‘renewable’ hydrogen and what is not. It is in this context that the European Commission published on 14 February 2023 the Delegated Act to regulate this fact.
One of the most relevant aspects of this regulation is that the temporal correlation between the origin of the electricity used and the hydrogen produced must be guaranteed. This correlation will have to be certified hour by hour from 2030 onwards, whereas until then it will be sufficient if it is done on a monthly basis.
Another important aspect of the standard is the ‘additionality’ requirement, which sets out that renewable projects dedicated to hydrogen production do not displace other existing electricity uses. This requirement means that, from 2028, hydrogen producers must prove that the clean electricity that powers their electrolysers comes from renewable projects commissioned within the last 36 months. The intention of this measure is clear: not to negatively affect the electrification of other sectors where electricity use is more efficient, in favour of green hydrogen production.
There is one exception to the additionality requirement which is where the electrolyser is connected to a grid with a carbon intensity of less than 18 gCO2/MJ. This benefits regions with large installed renewable capacity, as most European countries will be by the end of this decade. Not only that, those countries with a large installed nuclear capacity – such as France or Sweden – will also benefit, as they have an energy matrix with a reduced carbon footprint thanks to this energy source.
These rules are necessary to ensure that hydrogen makes a positive contribution to the decarbonisation of the European economy while dispelling many of the existing regulatory uncertainties. They also provide regulatory certainties that will help shape the green hydrogen market and help many hydrogen projects progress to the final investment decision.
Author: Francisco Velázquez, Charmain and Managing Partner.