Rystad Energy: the EU needs to compete for clean tech sovereignty

Rystad Energy analysis shows that the EU plans to deploy targeted anti-relocation measures, largely through a simplified regulatory framework and financial support mechanisms to accelerate deployment of clean tech. This may be enough to turn the tide, as regulatory bottlenecks and underdeveloped supply chains have held back clean tech development for years and now put the EU at a competitive disadvantage. We expect direct financial support, centralised one-stop shops for permitting and designated go-to areas for fast-tracked renewables development will contribute to accelerating the EU’s energy transition, but this will only be as effective as the administrative capacity allows.

In the battery and electric vehicle (EV) sector, which is the most contentious point between the EU and US, Rystad Energy believes that reducing administrative delays for battery supply chain projects may not be enough, and the EU could need to push forward all pillars in parallel. Although Europe has an existing and growing market base, the likelihood that the US increase its presence in the market has never been higher.

When it comes to green hydrogen, Rystad Energy analysis finds that the EU has high domestic production targets but has a long way to go to get there. To manage the risks of the US kickstarting its low-carbon hydrogen industry via simple production tax credits, the EU aims to provide a fixed premium for hydrogen production – however, as the proposed auction mechanism is bid-based and will happen in increments, it may be too little too late.

To accomplish these goals, it is crucial for the EU to first secure access to CRMs and, second, foster industries to turn CRMs into clean tech. In this regard, CRMs are the oil and gas of the energy transition, and against the backdrop of the ongoing war in Ukraine, the EU sees a similarity between Russia’s use of energy as a weapon and a CRM supply squeeze potentially being used to hinder its energy transition. This comes as the EU depends on China for CRMs, and should Chinese policy become more protectionist, the EU would have to either stand on its own, lean on other trade partners, or fall short of meeting its ambitions.

“Europe has always been an importer of energy, so the energy transition offers an unparalleled opportunity for the EU to flip the switch and secure its energy sovereignty. However, the EU finds itself between China’s existing market dominance and the US’ fiscal firepower. We believe that the EU could use its clout as the single largest market in the world, as well as the Green Deal Industrial Plan, REPowerEU and other policy levers to earn its energy security, and become sustainable in the process,” says Lars Nitter Havro, Senior Analyst, Clean Tech at Rystad Energy.

EU to counter Inflation Reduction Act with green hydrogen auction for domestic production

With the EU steaming towards a hydrogen economy, a strong supply chain that can support the upcoming demand for fuel cells and electrolysers will be critical. Although the demand is expected to mature in the medium- to long-term, being proactive and securing key competencies to hedge the costs that may emerge from postponing any development will be strategically significant. The EU has already been a front-runner in the hydrogen race, with extremely aggressive targets set under its REPowerEU push. The ambitious goal is 10 million tpy of domestic production and 10 million tpy in hydrogen imports. As of the end of 2022, the risked pipeline of projects in Europe alone amounted to around 9.2 million tpy within 2030, out of which the EU27 accounts for 7.8 million tpy. This is just 2.2 million tpy shy of the EU’s 2030 target.

That said, the US leapfrogged the EU with its aggressive Inflation Reduction Act credits including a production tax credit that can give developers up to US$3/kg of hydrogen. While there are still some unknowns, the simple credits in the US have triggered investors and companies to move across the Atlantic. The EU’s previously planned business incentives to boost continental hydrogen production were complicated but the recent communication from the Commission is aiming to change this. Instead of a complex and slow contract-for-difference (CfD), it intends to provide a fixed premium per kilogram of hydrogen, similar to the Inflation Reduction Act. Unlike the US Act, however, the EU will be more budget conscious by selecting projects from an auction with an initial budget of €800 million. The CfD and the European Hydrogen Bank remain on the horizon after this fixed price support.

The domestic supply only solves half of the target, and the EU is already working on forging trade ties with nations in Africa and the Middle East as well as with Australia, which are all slated to become key exporters on the back of their abundant renewable resources. To this end, we have assessed the viability of importing green hydrogen from a purely economic perspective. Our estimates show that the cost of importing green hydrogen via hydrogen carriers (such as ammonia and cracking it back to green hydrogen at point of use) may be more favorable than domestic production. As no operative large-scale cracking facilities currently exist, costs are modelled on smaller-scale projects – but large-scale projects are underway in several areas, such as Rotterdam, the Netherlands, and Rystad expects costs will come down substantially within the next four to six years. Cracking aside, importing green ammonia can be significantly cheaper than producing it in the EU and efforts have been made to develop the direct use of ammonia in many segments beside fertilizers and chemical industries – for instance, green ammonia is expected to be one of the largest offtake sectors of green hydrogen in the EU as a zero-carbon shipping fuel.

Despite potentially favorable import economics, domestic green hydrogen production will still play an important role as EU renewables could help produce it from excess offshore wind (and avoid curtailment) or abundant renewable resources in Southern Europe. Access to raw materials supply will be key to supporting the growth of a domestic hydrogen industry. As the EU has high dependency on raw materials for electrolyzer production – and with the most recent EU report on CRMs noting it has less than 1% of the required assembly supply chain for fuel cells – it will be crucial that the bloc ensures trade routes with economies rich in hydrogen-relevant CRMs, such as South Africa, which is a central player in the hydrogen CRM supply chain.

Read the article online at: https://www.globalhydrogenreview.com/hydrogen/06022023/rystad-energy-the-eu-needs-to-compete-for-clean-tech-sovereignty/