Is the US stealing Europe's thunder on hydrogen?
Is the US stealing Europe's thunder on hydrogen?
How the IRA allows Europe to build a hydrogen economy at a lower cost
Key Points:
• IRA makes US green hydrogen competitive globally
• Europe invests in demand-building mechanisms
• A production subsidy without a demand-building mechanism in the US is just a fiscal transfer to the EU
• EU should focus on innovation in green industrial technologies instead of competing for hydrogen production
Hydrogen has emerged as a hot topic on both sides of the Atlantic. The passage of the Inflation Reduction Act (IRA) in the United States has triggered excitement about the potential of hydrogen as a fuel, while European capitals are grappling with concerns over its potential negative impact on hydrogen investments across the European Union (EU).
At first glance, these concerns appear valid. Projects that have taken the financial investment decision reach $10 billion in the United States but only $7 billion in Europe.1 This is despite Europe announcing more than twice the number of projects compared to the US, as per data from the Hydrogen Council.2
In this first installment of a two-part series, I delve into the mechanisms supporting hydrogen in the US and Europe to shed light on how the IRA could help Europe building the hydrogen economy at a lower cost.
First, a summary of hydrogen support mechanisms in the US and the EU in Figure 1.
Figure 1: Summary of Hydrogen Support Mechanisms
IRA Puts US at the Forefront of Affordable Hydrogen Production
The IRA introduces unlimited production tax credits for hydrogen, potentially amounting to as much as $4.1/kgH2 for hydrogen produced from renewables (green hydrogen), depending on the specifics of the subsidy design.
In contrast, Europe’s approach to supporting hydrogen production is a patch work of various state-aid measures, totalling $12.7 billion. The recently announced European Hydrogen Bank (EHB) will provide production subsidies of up to $4.8/kgH2, but currently, this budget is capped at only €800 million for the first auction.
Figure 2: Comparison of Green Renewable Costs
Note: * Shipping costs include the expenses related to converting hydrogen to ammonia in the US, ammonia tanker rates from the US Gulf Coast to Rotterdam, and re-conversion of ammonia back to hydrogen in Rotterdam.
Source: 8760 analysis3
As illustrated in Figure 2, the IRA makes US-produced green hydrogen highly competitive even when considering shipping costs. While the EHB subsidy reduces the cost of EU-made green hydrogen, significantly below US imports, its current €800 million cap (for now) limits its impact.
Cheap Hydrogen, Limited Value
The cost of green hydrogen for domestic use in the United States still exceeds triple the prevailing prices of natural gas. The $9.5 billion allocated to clean hydrogen initiatives in the Infrastructure Investment and Jobs Act (IIJA) may stimulate some domestic demand, and some green hydrogen may replace existing hydrogen demand derived from natural gas. However, US-produced hydrogen could potentially fetch higher value elsewhere.
In contrast, the EU has instituted multiple mechanisms to boost the value of hydrogen within its borders. These measures encompass reforms in carbon pricing, including the gradual phase-out of free allowances to heavy industries and the introduction of the Carbon Border Adjustment Mechanism (CBAM). The carbon pricing reform alone adds approximately $0.6 per kilogram of hydrogen to its value in Europe upon full phase-out. Additionally, higher gas prices in the EU relative to the US further enhance the attractiveness of green hydrogen.
Figure 3: Benefits Derived from Avoided Natural Gas and EU ETS Allowance Purchases for CBAM-covered Industries
Note: The EU ETS avoided cost is depicted as rising, reflecting the CBAM phase-in. Natural gas costs are based on LNG short-run marginal cost pricing (low) and long-run marginal cost pricing (high).4
In addition, EU member states are actively creating demand by providing direct grants to industrial end-users. A substantial $5 billion has been earmarked for hydrogen-based steel plants, while Germany and the Netherlands jointly operate the $5.7 billion H2 global scheme, bridging the gap between supply prices and the market willingness to pay for hydrogen. Furthermore, the proposed $53.5 billion Carbon Contracts for Difference in Germany (so far) aims compensate green producers of industrial goods for their additional production costs relative to conventional producers. These measures collectively contribute to the high value of green hydrogen within the EU.
So What, if the US Leads in Hydrogen Production?
Much as high gas prices in the EU have attracted LNG cargoes from around the world, the elevated value of hydrogen within the EU will draw green hydrogen produced elsewhere. A country offering hydrogen production subsidies, but lacking demand support mechanisms, would effectively be providing a fiscal transfer to European Union energy consumers.
Rather than competing with other regions for hydrogen production, the EU and member states could redirect funds towards bolstering demand building programs. This shift would enable the EU to lead the race in innovations on green industrial technologies such as green steel, green cement, and green methanol. The EU can then do what it does best … exporting German-made capital goods to the world.
Hydrogen Council (May 2023), “Hydrogen Insights 2023”
See note 1
European hydrogen costs based on ICIS (5 April 2023), “EU Hydrogen Bank could bring renewable hydrogen costs below €1/kg”, available at https://www.icis.com/explore/resources/news/2023/04/05/10873154/eu-hydrogen-bank-could-bring-renewable-hydrogen-costs-below-1-kg/.
US levelized cost of hydrogen from Lazard (April 2023), “2023 Levelized Cost of Energy+”, available at https://www.lazard.com/research-insights/2023-levelized-cost-of-energyplus/.
Shipping costs from US Gulf Coast to Rotterdam from IEA (January 2023), “Energy Technology Perspectives 2023”, available at https://www.iea.org/reports/energy-technology-perspectives-2023.
Note that Lazard’s levelized cost of hydrogen estimates do not include the domestic content bonus provision in the Inflation Reduction Act
Fulwood (July 2023), “A New Global Gas Order? (Part 1): The Outlook to 2030 after the Energy Crisis”
Cover image by pikisuperstar on Freepik