The EU’s ambition is to make green hydrogen available throughout the region, and ramp up the transportation infrastructure as fast as possible to deliver it at a competitive price. But there are big disagreements between stakeholders over how and who should pay, explains Walter Boltz. The simplest solutions like focussing on hydrogen clusters will only deliver it to nearby customers. If only the customers pay it will make the hydrogen very expensive, limiting take-up and ramp-up. Boltz summarises his paper and cost analysis that shows that well-balanced cost mutualisation/cost socialisation approaches could help finance a truly European hydrogen transportation network without unduly burdening either gas or hydrogen customers or even state budgets. The bill should be spread between four categories: Users (of hydrogen); Other directly relevant energy users (e.g. gas); Beneficiaries of decarbonisation; Society. The regulatory framework should be created to split the cost burden fairly, while making sure the network infrastructure is rolled out quickly and delivers a hydrogen price that is competitive and therefore ensures market take-up across the EU.
The EU decarbonisation targets call for timely decarbonisation of the whole EU energy system, including the gas sector. A rapid ramping-up of an EU-wide hydrogen economy and decreasing reliance on natural gas is therefore required. Nevertheless, so far progress is limited to a small number of pilot projects.
Let’s get the regulatory system right
Establishing an EU-wide pure hydrogen transportation network will take significant time and require sizeable investments in the range of EUR 150 bn until 2050. A well-designed and coherent regulatory system will accelerate the growth of hydrogen markets and reduce the societal costs of the EU energy system transformation. In contrast, a badly designed, fragmented, and confusing regulatory system will slow down investments, create delays and uncertainties. It will therefore make decarbonisation more difficult and costly, risking the success of the EU-wide decarbonisation.
Regarding the financing of the needed infrastructure investments in networks and storage, economic theory and regulatory practice distinguish, in general, the following concepts:
- Society pays – subsidies from state or EU budgets,
- Beneficiaries (of decarbonisation) pay – taxes on energy usage in general,
- Users (of hydrogen) pay – cost-reflective tariffs, and
- Other (energy) users pay – tariffs on e. g. natural gas.
In today’s developed energy regulatory frameworks, the ‘users pay’ concept is applied in most member states for financing network assets. However, societal cohesion and other political aspects, e.g., in the context of rural and urban areas or existing and future customers, are routinely considered by regulators and all customers within an entry/exit area pay for major new infrastructures. Next to the financing and the cost of transport, other regulatory rules do have a significant impact on the attractiveness of hydrogen as an energy carrier and, thus, the speed and success of decarbonisation as well.
The European Commission (EC) is currently discussing different levels of regulation for hydrogen markets and especially networks. Very different policy choices for key economic and regulatory parameters, as, e. g., the financing of investments, with significant consequences for the development of the pure hydrogen infrastructures and, indeed, the hydrogen market are generally possible.
Sizeable investments are needed
Therefore, we performed a high-level analysis of potential alternatives and their consequences for financing the ramping-up of an EU-wide pure hydrogen infrastructure as input for informed policy discussions. The basis for the analysis is the actual data from thirteen EU Transmission System Operators (accounting for approximately 50% of today’s EU natural gas network) kindly provided by ENTSOG on an anonymous basis. Some of the main results are presented in this article.
The focus was on EU-level investment needs for ramping up the EU-wide pure hydrogen network (pipelines and compressor stations), considering that most of the future hydrogen network will consist of repurposed assets and only a smaller share will require the construction of new assets. ACER’s Unit Investment Costs are being used as a cost proxy for new assets. Repurposed assets are assumed to be significantly less costly, based on several engineering studies. Until 2050 no investments in natural gas assets, other than security of supply indicated ones, are considered.
Furthermore, we assume, that the overall demand for gaseous energy carriers will decrease until 2050, in line with EC’s policies and scenarios. However, there will still be considerable demand for green hydrogen transportation capacities by 2050. The ramping-up of such an EU-wide hydrogen network, serving the needs will require sizeable investments. For enabling an EU-wide pure hydrogen network, with about 50% of the capacities the natural gas network offers today, an investment of approximately EUR 150 bn at the EU level will be needed.
In general, the basic concept of the analysis is that the cost-efficient investments incurred, i.e., the depreciation must be earned via the bookings, i.e., the network utilisation every single year, as enshrined in the EU energy regulatory framework:
The current EU regulatory frameworks attempt to yield low costs and thus high utilisation rates. Clearly, with attractive tariffs, network connection and access rules, the utilisation and the number of customers connected to the network will ease the financing of network operation.
Cost-reflective hydrogen tariffs alone will prevent the establishment of an EU-wide pure hydrogen network
The proposed hydrogen cluster approach will not yield an EU-wide hydrogen market but will result in geographically limited and closed industrial niches of hydrogen usage. It will therefore allow only some industrial users, not even all, to decarbonise their gas usage via hydrogen. The alternatives and consequences for those companies excluded will very likely require additional financial support from the public.
Even with clusters, the initial ramping-up period of pure hydrogen will be characterised by sizeable investments and limited demand and utilisation of networks. It will therefore make a cost-based hydrogen tariff prohibitively expensive and slow down demand growth and market development or require substantial and continuing other public financings, e. g. via subsidies, state-aid, public funding, etc.
An EU-wide hydrogen network
A much more ‘hydrogen supportive’ approach would be to assure, from the beginning, attractive hydrogen transportation costs and a cost-efficient decarbonisation pathway by the combined treatment of the (efficient) costs of hydrogen and natural gas/decarbonised gases. This approach would imply that hydrogen users can benefit from the (still) large number of natural gas users and volumes transported in the coming years.
However, such an approach is currently not supported by some stakeholders, opposing cross-subsidisation either as a matter of principle or because of other considerations. For the sake of having an informed policy discussion, we assessed the consequences of different financing scenarios at the EU27 level in the full paper:
- Cost-reflective hydrogen transportation cost (purple striped);
- Cost-reflective natural gas transportation cost (red);
For the sake of comparison.
- Fixed hydrogen ‘level playing field’ transportation cost;
Fixed close to natural gas transportation costs to be competitive from the beginning, however, with a significant need for financial support; The results of this scenario are in the full paper.
- 100% hydrogen-cost-mutualisation transportation cost (blue);
One tariff for hydrogen and natural gas with a joint regulated asset base for all natural gas and hydrogen costs.
- 50% hydrogen-cost-mutualisation transportation cost (yellow striped) and the corresponding effects on natural gas transportation costs (in the full paper);
Natural gas consumers pay 50% of hydrogen network costs on top of the natural gas network costs; We have additionally assessed an 80% hydrogen-cost-mutualisation scenario in the full paper.
The figure above shows the effects of those different financing approaches on hydrogen (H2) and natural gas (NG) transportation costs at the EU27 level. Cost-reflective hydrogen transportation costs (purple striped) would be very high for several years until utilisation increases significantly.
However, high transportation costs would be a significant market entry barrier on top of high hydrogen costs, hindering utilisation growth. If we do not broaden the group of payers for hydrogen transportation (cost-based tariffication; purple striped) from the beginning, hydrogen will not be competitive with natural gas (red) soon, thus slowing down decarbonisation significantly. Alternatively, there would be the need for continuous and massive financial support until sufficient transportation volumes materialise in about 10-15 years.
In essence, the results show that if the group of payers for hydrogen ramp-up is larger (some level of cost mutualisation; yellow and blue), the hydrogen transportation costs decrease significantly during the ramping-up period. However, the natural gas transportation costs do not increase to a material extent. Hydrogen would be competitive with natural gas, and the burden on state budgets to finance hydrogen would be limited.
The conclusion is that if the EU wants to develop an EU-wide hydrogen market and further decarbonise within the given time frame until 2050, as all EU member states have committed to do, we need to implement a future-fit regulatory design that makes hydrogen attractive. Based on our analysis, we believe that a carefully optimised regulatory design should include a high degree of cost mutualisation, with a joint or separate regulated asset base for hydrogen and natural gas for the benefit of hydrogen attractiveness in the ramping-up. Otherwise, we will significantly delay or even prevent the decarbonisation of the EU gas markets.
Please feel free to have a look at the full paper ‘Alternatives for financing pure hydrogen networks’ itself for more on the results, conclusions and details on the methodology used. Comments, questions, and requests for a copy of the full paper can be addressed directly to the author at firstname.lastname@example.org or via LINKEDIN (linkedin.com/in/walter-boltz-836b8b2a)
It must be noted that this EU-level assessment can by no means replace TSO’s national network development exercises or the Ten Year’s Network Development Plan (TYNDP).
Walter Boltz is a Senior Advisor European Energy at Walter Boltz Consulting