Minimal quota for green hydrogen in industry: The consequences of the RED III
The third revision of the EU’s Renewable Energy Directive (RED III) entered into force on November 30, 2023. [1] It is intended to promote the use of renewable energies beyond the previous versions. Among other things, it also sets binding targets for the proportion of renewable sources in various end energy sectors in the coming years. One such target concerns the use of hydrogen in the industrial sector: 42% of the hydrogen used in industry is to be renewable by 2030, and as much as 60% by 2035. Currently, less than 1% of the hydrogen used worldwide is renewable. [2]
Hydrogen is used as a feedstock in many processes in the chemical and petroleum industries. The decarbonization of the steel industry will lead to further consumption in the future. Hydrogen can also be used as an energy source, for example to provide high-temperature heat or to generate electricity.
The demand for hydrogen in industry will therefore increase over the next few years. The RED III contributes to the effort that this increase will primarily mean an increase in the use of green hydrogen and a phase-out for fossil hydrogen. At the same time, it poses further challenges for the industrial companies concerned: On the one hand, highly integrated processes in which hydrogen is produced or can be used must be changed, and new supply chains must be established. On the other hand, companies are now also responsible for ensuring that the minimum proportions of green hydrogen are met.
This article explains the legal requirements of RED III, the resulting hydrogen requirements and costs, and possible implementation aids in order to make the background and consequences of RED III for the industry more understandable and to focus on some less considered issues.
What is required according to the RED III?
The newly added Article 22a of RED III refers to the ratio between two energy quantities: The energy content of the electricity-based fuels used divided by the energy content of the hydrogen used must be at least 42% and 60% in 2030 and 2035 respectively (see Figure 1). The member states are responsible for implementation. More precisely, electricity-based fuels are defined as RFNBO (renewable fuels of non-biological origin), which also includes green hydrogen. [3]
For the calculation it is not relevant whether the hydrogen or RFNBO is used as an energy carrier or as a feedstock: Both types of use are taken into account in consumption. However, in order to avoid double balancing – for example when using hydrogen for the transport fuels already covered by RED II – and to avoid creating an incentive to shift to more polluting processes, the article mentions three types of consumption that are not included in the calculation of energy volumes:
- Hydrogen used as intermediate products for the production of conventional transport fuels
- Hydrogen that is produced by decarbonizing industrial residual gas
- Hydrogen produced as a by-product or derived from by-products in industrial installations
A legal subtlety is still causing confusion regarding the exact definition of the term RFNBO: According to Article 27, paragraph (6) of RED III, electricity may be counted as fully renewable if it meets the criteria of a delegated act to be adopted by the EU Commission by December 31, 2021. This date was already in the past when RED III was published. It is generally understood that this is the same delegated act that was issued for the previous revision of the RED (Directive 2018/2001, RED II for short). In RED II, however, the term RFNBO only refers to fuels for the transport sector. The generalization to all sectors only took place with RED III. Consequently, the existing delegated act also only refers to the production of RFNBO “for transport”. [4] Industry and other sectors are not explicitly mentioned. A distinction could therefore also be made between sectors in a future regulation. However, it is under discussion that the rules will be generalized.
Which quantities of green hydrogen are going to be required?
Three industries in particular are at the forefront hydrogen use:
- petroleum industry
- chemical industry
- steel industry
Due to the exceptions mentioned in RED III, however, current consumption in the mineral oil industry is almost completely excluded from the calculation: a large proportion of the hydrogen used in refineries is either obtained as a by-product or used for the production of conventional transport fuels and is therefore already included in the targets for transport in RED II. [5] Future consumption of green hydrogen in refineries, in turn, depends heavily on the future supply chains for electricity-based fuels – and here, too, the production of fuels would be at the forefront.
The chemical industry in Germany already consumes around 37 TWh of hydrogen, particularly for the synthesis of ammonia and methanol. It is produced almost exclusively from fossil raw materials. Due to changes in process chains in the course of defossilization and use for the generation of high-temperature heat, hydrogen demand in the chemical industry is expected to increase in the coming years. Projections vary between 30 – 50 TWh in 2030 and between 40 – 90 TWh in 2035 [6].
The chemical industry in Germany already consumes around 37 TWh of hydrogen, in particular for the synthesis of ammonia and methanol. It is obtained almost exclusively from fossil fuels. Due to changes in process chains in the course of defossilization and the use for the generation of high-temperature heat, hydrogen demand in the chemical industry is expected to increase in the coming years. Projections vary between 30 – 50 TWh in 2030 and between 40 – 90 TWh in 2035 [6].
The current consumption of hydrogen in the steel industry is negligible. However, the switch from the CO2-intensive blast furnace route to the direct reduction process for primary steel production is expected to lead to a significant increase in the coming years. The actual quantities consumed in the steel industry will depend on the future availability of green hydrogen and the demand for (green) steel. According to estimates, consumption in Germany will be between 13 and 20 TWh in 2030 and between 23 and 30 TWh in 2035. [7] This corresponds to crude steel volumes of 6.5 to 10 million tons in 2030 and 11.5 to 15 million tons in 2035. These would already be relevant shares of the current production volume of around 34.5 million tons in 2023.
This results in hydrogen requirements of around 57 TWh in 2030 and 92 TWh in 2035 for the two industrial sectors of chemicals and steel. In order to meet the minimum shares in RED III, around 24 TWh of green hydrogen must therefore be available in 2030. By 2035, this amount will increase to 55 TWh of green hydrogen. (See Figure 2)
What do these quantities of green hydrogen signify for the industry?
In order to produce this amount of green hydrogen completely in Germany, an enormous expansion of electrolysis would have to take place. An electrolyser that meets the strict criteria of the delegated act for fully renewable electricity procurement achieves around 5000 full load hours in Germany. With an efficiency of 68%, around 7 GW of electrolysis capacity would therefore be required in 2030 just to cover the needs of the chemical and steel industries: 70% of the target set by the German government in the national hydrogen strategy. For the year 2035, 16.2 GW would be required to supply the two industries.
One possible alternative is the import of green hydrogen. Just like the hydrogen requirements in the industries, the projections for future hydrogen prices also range widely. Among other things, they are influenced by technology development, export country, import route and form as well as the development of a global market. For the year 2030, the study comparison by the Wuppertal Institute determines an average price of around € 109 / MWh (cost year 2025). [8] A slight fall in costs to around € 89 / MWh is expected by 2035. [9] The resulting costs for the necessary green hydrogen therefore amount to around €2.6 billion for 2030 and €4.9 billion for 2035.
This does not include the costs for transportation within Germany or for converting the process routes in the two industries. By way of comparison, the production of the same amount of gray hydrogen from steam reforming would entail natural gas costs of € 0.9 billion and € 2 billion respectively.
What are possible implementation measures for the industry quota?
The RED III is not yet directly binding for companies. Instead, the member states must ensure compliance with the minimum percentages. Although many industrial companies are already developing decarbonization strategies, their implementation is always tied to economic considerations. Voluntary implementation of the RED III requirements by individual companies seems unlikely due to the high additional costs. Government incentives and steering measures are therefore required in order to meet the RED III targets.
The most obvious approach is a direct transfer of the national targets to the company level: each company would be obliged to use 42% of the energy quantity of the hydrogen used from RFNBO by 2030 and 60% by 2035. In addition, a trading system for hydrogen certificates could be introduced, which would allow the obligation to use RFNBO to be transferred from one company to another. A similar system already exists for the national implementation of the requirements for the use of renewable energies in the transport sector in RED II: here, the distributors of fuels are obliged to ensure an increasing proportion of renewable energy sources in the fuels.
However, there is one key difference to the industrial sector: fuel consumers have little flexibility as to where they buy their fuel. The majority have to buy their fuel in Europe, where the corresponding RED II applies. This does not apply to customers in the chemical and steel industry: if the economic conditions are right, the supply chain can be switched to non-European producers. When designing an industry quota, care must therefore be taken to ensure that it does not lead to negative effects: A simple quota requirement for industry would make European steel and chemical products more expensive. Due to low margins in both industries, some of the additional costs would have to be passed on to customers or consumers. The minimum quota would not apply to producers outside the EU, so they would have a cost advantage. This would make production within Europe less competitive on the international market. On intra-European markets, the cost difference can in principle be offset by compensatory tariffs. However, a compensatory provision, such as that introduced for the European CO2 price EU-ETS in the form of the Carbon Border Adjustment Mechanism (CBAM), does not yet exist for the use of green hydrogen.
As a consequence, relocating production to non-European countries will become more attractive. This would have negative consequences for Europe as an industrial location, but would also hinder the transformation of industry towards climate neutrality: Instead of switching to green hydrogen, this would result in new investment in fossil production capacities. In addition to regulatory requirements, support measures are therefore needed to actively shape the transformation.
The EU’s “Important Projects of Common European Interest” (IPCEI) funding line allows member states to make funding available to industrial companies for innovative projects that play an important role in the EU’s strategic objectives via the usual state aid regulations, thereby closing the funding gap. With Hy2Move, the fourth wave of the hydrogen IPCEI was approved by the Commission on 29.05.2024 after Hy2Tech, Hy2Use and Hy2Infra. In total, the IPCEI in Germany will make it possible to support 31 companies in a wide range of sectors. In a similar procedure, the Commission approved state aid for the steel manufacturers Salzgitter, ThyssenKrupp, Saarstahl and AcelorMittal. All steel manufacturers will receive between €1 billion and €3 billion each for the transformation of their production processes and, in some cases, for the continuing purchase of green hydrogen.
In addition to this project-related financing, there are a number of other instruments that can accelerate the transformation if expanded accordingly. These include climate protection agreements, EU emissions trading, the recently published concept for green lead markets and the auctions of the European Hydrogen Bank’s H2 Global Foundation. Finally, infrastructure expansion is a critical factor. Here, too, an accelerating effect can be achieved at national and European level in order to make the quantities of hydrogen necessary for industry available and to create planning security for companies.
Conclusion
The minimum quota for the use of RFNBOs in the industrial sector poses major challenges for companies and nation states. However, if approached correctly, it can be a major driver in the transformation to a climate-neutral industry.
Further information
Literature
[1] Europäische Kommission (2023): Renewable Energy Directive, https://energy.ec.europa.eu/topics/renewable-energy/renewable-energy-directive-targets-and-rules/renewable-energy-directive_en (abgerufen am 03.06.2024)
[2] IEA (2023): Global hydrogen production by technology in the Net Zero Scenario, 2019-2030, https://www.iea.org/data-and-statistics/charts/global-hydrogen-production-by-technology-in-the-net-zero-scenario-2019-2030-3 (abgerufen am 03.06.2024)
[3] Richtlinie (EU) 2023/2413 des europäischen Parlaments und des Rates vom 18. Oktober 2023, https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=OJ:L_202302413 (abgerufen am 03.06.2024)
[4] Delegierte Verordnung (EU) 2023/1184 der Kommission vom 10. Feburar 2023, https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=CELEX:32023R1184 (abgerufen am 03.06.2024)
[5] acatech, DECHEMA (Hrsg.): Wasserstoff-Kompass – Handlungsoptionen für die Wasserstoffwirtschaft, Handlungsfeld Raffinerien (2023), https://dechema.de/Forschung/Studien+und+Positionspapiere/2024+03+H2+Kompass/_/H2K_IND_Raffinierien.pdf (abgerufen am 03.06.2024)
[6] acatech, DECHEMA (Hrsg.): Wasserstoff-Kompass – Präsentation zu Wasserstoff in der Chemieindustrie, https://www.wasserstoff-kompass.de/fileadmin/user_upload/img/news-und-media/dokumente/Chemische_Industrie.pdf (abgerufen am 03.06.2024)
[7] acatech, DECHEMA (Hrsg.): Wasserstoff-Kompass – Factsheet Wasserstoff in Stahlsektor (2022), https://www.wasserstoff-kompass.de/fileadmin/user_upload/img/news-und-media/dokumente/Fact_sheet_Stahl.pdf (abgerufen am 03.06.2024)
[8] Merten, F. & Scholz, A. (2023). Meta-Analysis of the Costs of and Demand for Hydrogen in the Transformation to a Carbon-Neutral Economy. Wuppertal Institute. https://epub.wupperinst.org/frontdoor/deliver/index/docId/8417/file/8417_Hydrogen.pdf (abgerufen am 03.06.2024)
[9] ENTSO-E // ENTSO-G (2022), TYNDP 2022 Scenario Building Guidelines, https://2022.entsos-tyndp-scenarios.eu/wp-content/uploads/2022/04/TYNDP_2022_Scenario_Building_Guidelines_Version_April_2022.pdf (abgerufen am 03.06.2024)
